Commentary on theHorizontal

MergerGuidelines

U.S. Department of Justice Federal Trade Commission

March 2006

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Table of ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Governing Legal Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview of Guidelines Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Agencies’ Focus Is on Competitive Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Investigations Are Intensively Fact-Driven, Iterative Processes . . . . . . . . . . . . . . . . . . . . . . 3

The Same Evidence Often Is Relevant to Multiple Elements of the Analysis . . . . . . . . . . . 3

Commentary Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. Market Definition and Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Mechanics of Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Breadth of Relevant Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Evidentiary Sources for Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Importance of Evidence from and about Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Evidence of Effects May Be the Analytical Starting Point . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Industry Usage of the Word “Market” Is Not Controlling . . . . . . . . . . . . . . . . . . . . . . . . . 11

Market Definition and Integrated Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Market Definition Is Linked to Competitive Effects Analysis . . . . . . . . . . . . . . . . . . . . . . . 12

Market Definition and Competitive Effects Analyses May Involve the Same Facts . . . . 14

Integrated Analysis Takes into Account that DefinedMarket Boundaries Are Not Necessarily Precise or Rigid . . . . . . . . . . . . . . . . . . . . . . . 15

Significance of Concentration and Market Share Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2. The Potential Adverse Competitive Effects of Mergers . . . . . . . . . . . . . . . . . . . . . . . . . 17Coordinated Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Additional Market Characteristics Relevant to Competitive Analysis . . . . . . . . . . . . . . . 20

Role of Evidence of Past Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Maverick and Capacity Factors in Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Unilateral Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Unilateral Effects from Merger to Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Unilateral Effects Relating to Capacity and Output for Homogeneous Products . . . . . . 27

Unilateral Effects Relating to Pricing of Differentiated Products . . . . . . . . . . . . . . . . . . . . 27

Unilateral Effects Relating to Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Unilateral Effects Relating to Bargaining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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3. Entry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Likelihood of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Sunk Costs and Risks Associated with Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Consumer Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Industrial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Other Significant Obstacles to Successful Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Cost Disadvantages of Entrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Timeliness of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Sufficiency of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

4. Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Efficiencies the Agencies Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Merger-Specific Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Cognizable Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Verification of Efficiency Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Sufficiency of Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

“Out-of-Market” Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Fixed-Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Supporting Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Referenced Agency Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Case Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

U.S. Department of Justice Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Federal Trade Commission Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

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ForewordMergers between competing firms, i.e.,

“horizontal” mergers, are a significant dynamicforce in the American economy. The vast majorityof mergers pose no harm to consumers, and manyproduce efficiencies that benefit consumers in theform of lower prices, higher quality goods orservices, or investments in innovation. Efficienciessuch as these enable companies to compete moreeffectively, both domestically and overseas.

Fourteen years ago, to describe theirapplication of the antitrust laws to horizontalmergers, the Federal Trade Commission and theU.S. Department of Justice (collectively, the“Agencies”)—the two federal Agenciesresponsible for U.S. antitrust law enforcement—jointly issued the 1992 Horizontal MergerGuidelines (the “Guidelines”). In 1997, theAgencies jointly issued revisions to the Guidelines’section on Efficiencies. Since these publicationswere issued, the Agencies have consistentlyapplied the Guidelines’ analytical framework tothe horizontal mergers under their review.

Today, to provide greater transparency andfoster deeper understanding regarding antitrustlaw enforcement, the Agencies jointly issue thisCommentary on the Guidelines.

The Commentary continues the Agencies’ongoing efforts to increase the transparency oftheir decision-making processes. These effortsinclude the Agencies’ joint publication of MergerChallenges Data, Fiscal Years 1999–2003 (issuedDecember 18, 2003), the Commission’s subsequentpublication of Horizontal Merger InvestigationData, Fiscal Years 1996–2003 (issued February 2,2004 and revised August 31, 2004), theDepartment’s Merger Review Process Initiative(issued October 12, 2001 and revised August 4,2004), the Reforms to the Merger Review Processat the Commission (issued February 16, 2006), and

the Department’s and Commission’s increased useof explanatory closing statements followingmerger investigations.

The Commentary follows on the Agencies’February 2004 Merger Enforcement Workshop.Over three days, leading antitrust practitionersand economists who have examined merger policyand the Guidelines’ analytical frameworkdiscussed in detail all sections of the Guidelines.The Workshop focused on whether the analyticalframework set forth by the Guidelines adequatelyserves the dual purposes of leading to appropriateenforcement decisions on proposed horizontalmergers, and providing the antitrust bar and thebusiness community with reasonably clearguidance from which to assess the antitrustenforcement risks of proposed transactions.

Workshop participants generally agreed thatthe analytical framework set out in the Guidelinesis effective in yielding the right results inindividual cases and in providing advice to partiesconsidering a merger. Thus, the Agenciesconcluded that a revamping of the Guidelines isneither needed nor widely desired at this time.Rather, the Guidelines’ analytic framework hasproved both robust and sufficiently flexible toallow the Agencies properly to account for theparticular facts presented in each mergerinvestigation.

The Agencies also have observed that theantitrust bar and business community would finduseful and beneficial an explication of how theAgencies apply the Guidelines in particularinvestigations. This Commentary is intended torespond to this important public interest byenhancing the transparency of the analyticalprocess by which the Agencies apply the antitrustlaws to horizontal mergers.

Deborah Platt MajorasChairman

Federal Trade Commission

Thomas O. BarnettAssistant Attorney General for AntitrustU.S. Department of Justice

March 2006

IntroductionGoverning Legal Principles

The principal federal antitrust laws applicableto mergers are section 7 of the Clayton Act, section1 of the Sherman Act, and section 5 of the FederalTrade Commission Act. Section 7 proscribes amerger the effects of which “may be substantiallyto lessen competition.” Section 1 prohibits anagreement that constitutes an unreasonable“restraint of trade.” Section 5, which the FederalTrade Commission enforces, proscribes “unfairmethods of competition.” Over many decades, thefederal courts have provided an expansive body ofcase law interpreting these statutes within thefactual and economic context of individual cases.

The core concern of the antitrust laws,including as they pertain to mergers betweenrivals, is the creation or enhancement of marketpower. In the context of sellers of goods orservices, “market power” may be defined as theability profitably to maintain prices abovecompetitive levels for a significant period of time.Market power may be exercised, however, notonly by raising price, but also, for example, byreducing quality or slowing innovation. Inaddition, mergers also can create market power onthe buying side of a market. Most mergersbetween rivals do not create or enhance marketpower. Many mergers, moreover, enable themerged firm to reduce its costs and become moreefficient, which, in turn, may lead to lower prices,higher quality products, or investments ininnovation. However, the Agencies challengemergers that are likely to create or enhance themerged firm’s ability—either unilaterally orthrough coordination with rivals—to exercisemarket power.

Following their mandate under the antitruststatutory and case law, the Agencies focus theirhorizontal merger analysis on whether thetransactions under review are likely to create orenhance market power. The Guidelines set forth

the analytical framework and standards,consistent with the law and with economiclearning, that the Agencies use to assess whetheran anticompetitive outcome is likely. The unifyingtheme of that assessment is “that mergers shouldnot be permitted to create or enhance marketpower or to facilitate its exercise.” Guidelines§ 0.1. The Guidelines are flexible, allowing theAgencies’ analysis to adapt as business practicesand economic learning evolve.

In applying the Guidelines to the transactionsthat each separately reviews, the Agencies striveto allow transactions unlikely substantially tolessen competition to proceed as expeditiously aspossible. The Agencies focus their attention onquickly identifying those transactions that couldviolate the antitrust laws, subjecting those mergersto greater scrutiny. Most mergers that posesignificant risk to competition come to theAgencies’ attention before they are consummatedunder the premerger notification and reportingrequirements of the Hart-Scott-Rodino AntitrustImprovements Act of 1976, 15 U.S.C. § 18a(“HSR”). HSR requires that the parties to atransaction above a certain size notify theAgencies before consummation and prohibitsconsummation of the transaction until expirationof one or more waiting periods during which oneof the Agencies reviews the transaction. Thewaiting periods provide the Agencies time toreview a transaction before consummation.

For more than 95% of the transactions reportedunder HSR, the Agencies promptly determine—i.e., within the initial fifteen- or thirty-day waitingperiod that immediately follows HSR filings—thata substantial lessening of competition is unlikely.The Agencies base such expeditiousdeterminations on material provided as part of theHSR notification, experience from priorinvestigations, and other market information. Formany industries, a wealth of information isavailable from government reports, trade

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directories and publications, and Internetresources. For some transactions, the partiesvolunteer additional information, and for some,the Agencies obtain information from non-publicsources. The most important non-public sourcesare market participants, especially the parties’customers, who typically provide informationvoluntarily when the Agencies solicit theircooperation.

Evidence that the merged firm would have arelatively high share of sales (or of capacity, or ofunits, or of another relevant basis formeasurement) or that the market is relativelyhighly concentrated may be particularlysignificant to a decision by either of the Agenciesto extend a pre-merger investigation pursuant toHSR by issuing a request for additionalinformation (commonly referred to as a “secondrequest”). A decision to issue a second requestmust be made within the initial HSR thirty-daywaiting period (fifteen days for cash tenderoffers), or the parties will no longer be preventedunder HSR from consummating their merger. Asecond request may be necessary when it is notpossible within thirty days to gather and analyzethe facts necessary to address appropriately thecompetitive concerns that may arise at thethreshold of the investigation, such as whenparties to a merger appear to have relatively highshares in the market or markets in which theycompete. Although the ultimate decision ofwhether a merger likely will be anticompetitive isbased heavily on evidence of potentialanticompetitive effects, the Agencies find that onlyin extraordinary circumstances can they conductan extensive competitive effects analysis withinthirty days. That is why market shares andconcentration levels, which have some predictivevalue, frequently are used as at least a startingpoint during the initial waiting period.

Sometimes the Agencies also investigateconsummated mergers, especially when evidencesuggests that anticompetitive effects may haveresulted from them. The Agencies applyGuidelines analysis to consummated mergers aswell as to mergers under review pursuant to HSR.

Overview of Guidelines AnalysisThe Guidelines’ five-part organizational

structure has become deeply embedded inmainstream merger analysis. These parts are: (1)

market definition and concentration; (2) potentialadverse competitive effects; (3) entry analysis; (4)efficiencies; and (5) failing and exiting assets.

Each of the Guidelines’ sections identifies adistinct analytical element that the Agencies applyin an integrated approach to merger review. Theordering of these elements in the Guidelines,however, is not itself analytically significant,because the Agencies do not apply the Guidelinesas a linear, step-by-step progression thatinvariably starts with market definition and endswith efficiencies or failing assets. Analysis ofefficiencies, for example, does not occur “after”competitive effects or market definition in theAgencies’ analysis of proposed mergers, but ratheris part of an integrated approach. If the conditionsnecessary for an anticompetitive effect are notpresent—for example, because entry wouldreverse that effect before significant timeelapsed—the Agencies terminate their reviewbecause it would be unnecessary to address all ofthe analytical elements.

The chapters that follow, in the context ofspecific analytical elements such as marketdefinition or entry, describe many principles ofGuidelines analysis that the Agencies apply in thecourse of investigating mergers. Three significantprinciples are generally applicable throughout.

The Agencies’ Focus Is onCompetitive Effects

The Guidelines’ integrated process is “a toolthat allows the Agency to answer the ultimateinquiry in merger analysis: whether the merger islikely to create or enhance market power orfacilitate its exercise.” Guidelines § 0.2. At thecenter of the Agencies’ application of theGuidelines, therefore, is competitive effectsanalysis. That inquiry directly addresses the keyquestion that the Agencies must answer: Is themerger under review likely substantially to lessencompetition? To this end, the Agencies examinewhether the merger of two particular rivalsmatters, that is, whether the merger is likely toaffect adversely the competitive process, resultingin higher prices, lower quality, or reducedinnovation.

The Guidelines identify two broad analyticalframeworks for assessing whether a mergerbetween competing firms may substantially lessencompetition. These frameworks require that the

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Agencies ask whether the merger may increasemarket power by facilitating coordinatedinteraction among rival firms and whether themerger may enable the merged firm unilaterally toraise price or otherwise exercise market power.Together, these two frameworks are intended toembrace every competitive effect of any form ofhorizontal merger. The Guidelines were neverintended to detail how the Agencies would assessevery set of circumstances that a proposed mergermay present. As the Guidelines themselves note,the specific standards set forth therein must beapplied to a broad range of possible factualcircumstances.

Investigations Are IntensivelyFact-Driven, Iterative Processes

Merger analysis depends heavily on thespecific facts of each case. At the outset of aninvestigation, when Agency staff may knowrelatively little about the merging firms, theirproducts, their rivals, or the applicable relevantmarkets, staff typically contemplates several broadhypotheses of possible harm.

For example, based on initial information, staffmay hypothesize that a merger would reduce thenumber of competitors from four to three and, inso doing, may foster or enhance coordination byenabling the remaining firms profitably to allocatecustomers based on prior sales. Staff also mighthypothesize that the products of the merging firmsare particularly close substitutes with respect toproduct characteristics or geographic location suchthat unilateral anticompetitive effects are likely.

Staff evaluates potential competitive factors ofthis sort by gathering additional information andconducting intensive factual analysis to assessboth the applicability of individual analyticalframeworks and their implications for the likelycompetitive effects of the merger. As it learnsmore about the merging firms and the marketenvironment in which they compete, staff rejectsor refines its hypotheses of probable relevantmarkets and competitive effects, ultimatelyresulting in a conclusion about likelihood of harm.If the facts do not point to such a likelihood, themerger investigation is closed.

In testing a particular postulated risk ofcompetitive harm arising from a merger, theAgencies take into account pertinentcharacteristics of the market’s competitive process

using data, documents, and other informationobtained from the parties, their competitors, theircustomers, databases of various sorts, andacademic literature or private industry studies.The Agencies carefully consider the views ofinformed customers on market structure, thecompetitive process, and anticipated effects fromthe merger. The Agencies further consider anyinformation voluntarily provided by the parties,which may include extensive analyses preparedby economists or in consultation with economists.The Agencies also carefully consider prospects forefficiencies that the proposed transaction maygenerate and evaluate the effects of anyefficiencies on the outcome of the competitiveprocess.

The Same Evidence Often Is Relevantto Multiple Elements of the Analysis

A single piece of evidence often is relevant toseveral issues in the assessment of a proposedmerger. For example, mergers frequently occur inmarkets that have experienced prior mergers.Sometimes evidence exists concerning the effectsof prior mergers on various attributes ofcompetition. Such evidence may be probative, forexample, of the scope of the relevant product andgeographic markets, of the likely competitiveeffects of the proposed merger, and of thelikelihood that entry would deter or counteractany attempted exercise of market power followingthe merger under review. Similarly, evidence ofactual or likely anticompetitive effects from amerger could be used in addressing the scope ofthe market or entry conditions.

An investigation involving potentialcoordinated effects may uncover evidence of pastcollusion and sustained supra-competitive pricesin the market. This information can be relevant toseveral elements of the analysis. The product andgeographic markets that were subject to collusionin the past may be probative of the relevantproduct and geographic markets today. Thatentry failed to undermine collusion in the pastmay be probative of whether entry is likely today.Of course, during its investigation, the Agencymay discover facts that tend to negate thesepossibilities. For example, since collusionoccurred, new production technologies may haveemerged that have altered the ability or incentivesof firms to coordinate their actions. Similarly,innovation may have led to the introduction of

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new products that compete with the incumbentproducts and constrain the ability of the mergingfirms and their rivals to coordinate successfully inthe future.

Commentary OutlineIn the chapters that follow, the Commentary

explains how the Agencies have applied particularGuidelines’ provisions relating to marketdefinition and concentration, competitive effects(including coordinated interaction and unilateraleffects analysis), entry conditions, and efficiencies.Application of the Guidelines’ provisions relatingto failure and exiting assets is not discussed in theCommentary because those provisions are veryinfrequently applied. For convenience, the orderof these chapters follows the order of the issues setforth in the Guidelines.

Included throughout the Commentary areshort summaries of matters that the Agencies haveinvestigated. They have been included to furtherunderstanding of the principles under discussionat that point in the narrative. None of thesummaries exhaustively addresses all thepertinent facts or issues that arose in theinvestigation. No other significance should beattributed to the selection of the matters used asexamples. (In some instances in the Efficiencieschapter, names and other key facts of actualmatters are changed to protect the confidentialityof business and proprietary information. Each isnoted as a “Disguised Example.”) An Index at theend of the Commentary lists all of the mergersdiscussed in these case examples and providescitations to additional public information.

For the reader’s convenience, the caseexamples briefly state how each investigationended, i.e., whether it was closed because theAgency determined not to challenge the merger orbecause the parties abandoned the merger inresponse to imminent Agency challenge, orwhether the investigation proceeded to a consentagreement or to litigation. The discussion withineach case example pertains solely to the relevantAgency’s analysis of the merger, and does notelaborate on any subsequent judicial oradministrative proceedings.

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1. Market Definition andConcentration

The Agencies evaluate a merger’s likelycompetitive effects “within the context ofeconomically significant markets—i.e., marketsthat could be subject to the exercise of marketpower.” Guidelines § 1.0. The purpose of mergeranalysis under the Guidelines is to identify thosemergers that are likely to create or enhance marketpower in any market. The Agencies thereforeexamine all plausible markets to determinewhether an adverse competitive effect is likely tooccur in any of them. The market definitionprocess is not isolated from the other analyticcomponents in the Guidelines. The Agencies donot settle on a relevant market definition beforeproceeding to address other issues. Rather,market definition is part of the integrated processby which the Agencies apply Guidelinesprinciples, iterated as new facts are learned, toreach an understanding of the merger’s likelyeffect on competition.

The mechanics of how the Agencies definemarkets using the Guidelines method has been thesubject of extensive discussion in legal andeconomic literature and appears to be wellunderstood in the antitrust community. ThisCommentary, accordingly, provides only a briefoverview of the mechanics. The remainder of thischapter addresses a number of discrete topicsconcerning market definition issues thatfrequently arise in merger investigations.

Mechanics of Market DefinitionThe Guidelines define a market as “a product

or group of products and a geographic area inwhich it is produced or sold such that ahypothetical profit-maximizing firm, not subject toprice regulation, that was the only present andfuture producer or seller of those products in that

area likely would impose at least a ‘small butsignificant and nontransitory’ increase in price,assuming the terms of sale of all other productsare held constant.” Guidelines § 1.0.

This approach to market definition is referredto as the “hypothetical monopolist” test. Todetermine the effects of this “‘small but significantand nontransitory’ increase in price” (commonlyreferred to as a “SSNIP”), the Agencies generallyuse a price increase of five percent. This testidentifies which product(s) in which geographiclocations significantly constrain the price of themerging firms’ products.

The Guidelines’ method for implementing thehypothetical monopolist test starts by identifyingeach product produced or sold by each of themerging firms. Then, for each product, ititeratively broadens the candidate market byadding the next-best substitute. A relevantproduct market emerges as the smallest group ofproducts that satisfies the hypothetical monopolisttest. Product market definition depends criticallyupon demand-side substitution—i.e., consumers’willingness to switch from one product to anotherin reaction to price changes. The Guidelines’approach to market definition reflects theseparation of demand substitutability from supplysubstitutability—i.e., the ability and willingness,given existing capacity, of firms to substitute frommaking one product to producing another inreaction to a price change. Under this approach,demand substitutability is the concern of marketdelineation, while supply substitutability andentry are concerned with current and futuremarket participants.

Definition of the relevant geographic market isundertaken in much the same way as productmarket definition—by identifying the narrowestpossible market and then broadening it by

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iteratively adding the next-best substitutes. Thus,for geographic market definition, the Agenciesbegin with the area(s) in which the merging firmscompete respecting each relevant product, andextend the boundaries of those areas until an areais determined within which a hypotheticalmonopolist would raise prices by at least a smallbut significant and non-transitory amount.

DaVita–Gambro (FTC 2005) DaVita Inc.,proposed to acquire Gambro Healthcare, Inc.The firms competed across the United States inthe provision of outpatient dialysis services forpersons with end stage renal disease (“ESRD”).Commission staff found that the relevantgeographic markets within which to analyzethe transaction’s likely competitive effects werelocal. Most ESRD patients receive treatmentsabout 3 times per week, in sessions lasting 3–5hours, and in general either are unwilling orunable to travel more than 30 miles or 30minutes to receive kidney dialysis treatment.In the process of defining the geographicmarket, staff identified the MetropolitanStatistical Areas (“MSAs”) within which bothfirms had outpatient dialysis clinics, thenexamined each area to determine if geographicfactors such as mountains, rivers, and bays,and travel conditions, were such that the scopeof the relevant market differed from the MSA’sboundaries.

Within each such MSA, staff isolated thearea immediately surrounding each dialysisclinic of both merging parties, and assessedwhether a hypothetical monopolist within thatarea would impose a significant price increase.Staff expanded the boundaries of each areauntil the evidence showed that such ahypothetical monopolist would impose asignificant price increase. From interviewswith industry participants and analysis ofdocuments, staff found that, in general,dialysis patients tend to travel greaterdistances in rural and suburban areas than indense urban areas, where travel distances assmall as 5–10 miles may take significantly morethan 30 minutes, due to congestion, roadconditions, reliance on public transportation,and other factors. Maps indicating thelocations from which each clinic drew itspatients were particularly useful. Thus, someMSAs included within their respective

boundaries many distinct areas over which ahypothetical monopolist would exercisemarket power. The Commission entered intoa consent agreement with the parties to resolvethe concern that the transaction would likelylead to anticompetitive effects in 35 localmarkets. In an order issued with the consentagreement, the Commission required, amongother things, the divestiture of dialysis clinicsin the 35 markets at issue.

The Breadth of Relevant MarketsDefining markets under the Guidelines’

method does not necessarily result in markets thatinclude the full range of functional substitutesfrom which customers choose. That is because, asthe Guidelines provide, a “relevant market is agroup of products and a geographic area that is nobigger than necessary to satisfy [the hypotheticalmonopolist] test.” Guidelines § 1.0. This is one ofseveral points at which the Guidelines articulatewhat is referred to in section 1.21 as the “‘smallestmarket’ principle” for determining the relevantmarket. The Agencies frequently conclude that arelatively narrow range of products or geographicspace within a larger group describes thecompetitive arena within which significantanticompetitive effects are possible.

Nestle–Dreyer’s (FTC 2003) Nestle Holdings,Inc., proposed to merge with Dreyer’s GrandIce Cream, Inc. The firms were rivals in thesale of superpremium ice cream. Ice cream isdifferentiated on the basis of the quality ofingredients. Compared to premium and non-premium ice cream, superpremium ice creamcontains more butterfat, less air, and morecostly ingredients. Superpremium ice creamsells at a substantially higher price thanpremium ice cream. Using scanner data,Commission staff estimated demandelasticities for the superpremium, premium,and economy ice cream segments. Staff’sanalysis showed that a hypotheticalmonopolist of superpremium ice cream wouldincrease prices significantly. This, togetherwith other documentary and testimonialevidence, indicated that the relevant market inwhich to analyze the transaction wassuperpremium ice cream. The Commissionentered into a consent agreement with themerging firms, requiring divestiture of two

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brands and of key distribution assets.

UPM–MACtac (DOJ 2003) UPM-KymmeneOyj sought to acquire (from Bemis Co.)Morgan Adhesives Co. (“MACtac”). Theywere two of the three largest producers ofpaper pressure-sensitive labelstock, fromwhich “converters” make pressure-sensitivelabels. End users peel pressure-sensitive labelsoff a silicon-coated base material and directlyapply them to items being labeled. TheDepartment challenged the acquisition on thebasis of likely anticompetitive effects in tworelevant product markets. One was paperlabelstock used to make pressure sensitivelabels for “variable information printing”(“VIP”). Some or all of the printing on VIPlabels is done by end users as the label isapplied. A familiar example is the pricelabeling of fresh meat sold in supermarkets.Although paper labelstock for VIP labelscompetes with plastic film labelstock, theDepartment found that film labels are ofsufficiently higher cost that a hypotheticalmonopolist of paper labelstock for VIP labelswould raise price significantly. The otherrelevant product market was paper labelstockused for “prime” labels. Prime labels are usedfor product identification and are printed inadvance of application. Paper labelstock forprime labels, competes not just with filmlabelstock, but also with pre-printed packagingand other means of product identification.Nevertheless, the Department found that ahypothetical monopolist of paper labelstock forprime labels would raise price significantlybecause users of pressure-sensitive paperlabels find them the least-cost alternative fortheir particular applications and because theywould have to incur significant switching costsif they adopted an alternative means ofproduct identification. After trial, the courtenjoined the consummation of the acquisition.

Tenet–Slidell (FTC 2003) Tenet Health CareSystems owned a hospital in Slidell, Louisiana(near New Orleans), and proposed to acquireSlidell’s only other full-service hospital. Therewere many other full-service hospitals in theNew Orleans area but all were outside ofSlidell. Commission staff found that asignificant number of Slidell residents andtheir employers required access to either of the

two Slidell hospitals in their private healthinsurance plans. The Slidell hospitalscompeted against each other for inclusion inhealth plan networks. After merging, thecombined hospital would have had no rivalwith “must have” network status amongSlidell residents and employers. Ahypothetical monopolist of the Slidell hospitalslikely would have imposed a small butsignificant and non-transitory price increase onhealth plans selling coverage in Slidell, becauseneighboring hospitals outside of Slidell werenot effective substitutes for network inclusion.The relevant geographic market, therefore, waslimited to hospitals located in Slidell. UnderLouisiana law, proposed acquisitions of not-for-profit hospitals must be approved by theLouisiana Attorney General. By invitation ofthe state Attorney General, Commission staff,in a public letter authorized by theCommission, advised the Attorney General ofthe staff’s view that, based on the factsgathered in its then-ongoing investigation, theproposed acquisition raised seriouscompetitive concerns. In a vote authorized bylocal law, parish residents subsequentlyrejected the proposed transaction, which neverwas consummated.

In sections 1.12 and 1.22, the Guidelinesexplain that the Agencies may define relevantmarkets on the basis of price discrimination if ahypothetical monopolist likely would exercisemarket power only, or especially, in sales toparticular customers or in particular geographicareas. The Agencies address the same basic issuesfor any form of discrimination: Would pricediscrimination, if feasible, permit a significantlygreater exercise of market power? Couldcompetitors successfully identify the transactionsto be discriminated against? Would customers orthird parties be able to undermine substantiallythe discrimination through some form of arbitragein which a product sold at lower prices to somecustomer groups is resold to customer groupsintended by the firms to pay higher prices? Incases in which a hypothetical monopolist is likelyto target only a subset of customers foranticompetitive price increases, the Agencies arelikely to identify relevant markets based on theability of sellers to price discriminate.

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Quest–Unilab (FTC 2003) Quest Diagnostics,Inc. and Unilab Corp., the two leadingproviders of clinical laboratory testing servicesto physician groups in Northern California,proposed to merge. Their combined marketshare would have exceeded 70%; the nextlargest rival had a market share of 4%. Clinicallaboratory testing services are marketed andsold to various groups of customers, includingphysicians, health insurers, and hospitals.Commission staff determined that purchasersof these services cannot economically resellthem to other customers, and that suppliers ofthe services can potentially identify thecompetitive alternatives available to physiciangroup customers according to the group’s baseof physicians and geographic coverage. Thisinformation indicated that a hypotheticalmonopolist could discriminate on price amongcustomer types. Suppliers’ ability to pricediscriminate, combined with the fact that sometypes of customers had few competitivealternatives to contracting with suppliers thathad a network of locations, led staff to definemarkets based on customer categories. TheCommission issued a complaint alleging thatthe transaction would lessen competitionsubstantially in one of the customer categories:the provision of clinical laboratory testingservices to physician groups in NorthernCalifornia. An accompanying consent orderrequired divestiture of assets used to provideclinical laboratory testing services to physiciangroups in Northern California.

Ingersoll-Dresser–Flowserve (DOJ 2000)Flowserve Corp. agreed to acquire Ingersoll-Dresser Pump Co. Both firms produced abroad array of pumps used in industrialprocesses. The Department challenged theproposed acquisition on the basis of likelyanticompetitive effects in “API 610” pumps,which are used by oil refineries, and pumpsused in electric power plants. Both sorts ofpumps are customized according to thespecifications of the particular buyer and aresold through bidding mechanisms.Customization of the pumps made arbitrageinfeasible. The Department concluded that thecompetition in each procurement was entirelydistinct and therefore that each procurementtook place in a separate and distinct relevantmarket. The Department’s challenge to the

merger was resolved by consent decree.

Interstate Bakeries–Continental (DOJ 1995)The Department challenged Interstate BakeriesCorp.’s purchase of Continental Baking Co.from Ralston Purina Co. The challengefocused on white pan bread, and theDepartment found that the purchase likelywould have produced significant priceincreases in five metropolitan areas—Chicago,Milwaukee, Central Illinois, Los Angeles, andSan Diego. Among the reasons theDepartment concluded that competition waslocalized to these metropolitan areas were thatbakers charged different prices for the samebrands produced in the same bakeries,depending on where the bread was sold, andthat arbitrage was infeasible. Arbitrage wasexceptionally costly because the bakersthemselves placed their bread on thesupermarket shelves, so arbitrage requiredremoving bread from the shelves, reshippingit, and reshelving it. This process also wouldconsume a significant portion of the briefperiod during which the bread is fresh. TheDepartment settled its challenge to theproposed merger by a consent decree requiringdivestiture of brands and related assets in thefive metropolitan areas.

The Guidelines indicate that the relevantmarket is the smallest collection of products andgeographic areas within which a hypotheticalmonopolist would raise price significantly. Attimes, the Agencies may act conservatively andfocus on a market definition that might not be thesmallest possible relevant market. For example,the Agencies may focus initially on a bright lineidentifying a group of products or areas withinwhich it is clear that a hypothetical monopolistwould raise price significantly and seek todetermine whether anticompetitive effects are—orare not—likely to result from the transaction insuch a candidate market. If the answer for thebroader market is likely to be the same as for anyplausible smaller relevant market, there is no needto pinpoint the smallest market as the precise linedrawn does not affect the determination ofwhether a merger is anticompetitive. Also, whenthe analysis is identical across products orgeographic areas that could each be defined asseparate relevant markets using the smallestmarket principle, the Agencies may elect to

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employ a broader market definition thatencompasses many products or geographic areasto avoid redundancy in presentation. TheGuidelines describe this practice of aggregation“as a matter of convenience.” Guidelines § 1.321n.14.

Evidentiary Sources forMarket DefinitionThe Importance of Evidencefrom and about Customers

Customers typically are the best source, and insome cases they may be the only source, of criticalinformation on the factors that govern their abilityand willingness to substitute in the event of a priceincrease. The Agencies routinely solicitinformation from customers regarding theirproduct and supplier selections. In selecting theirsuppliers, customers typically evaluate thealternatives available to them and can oftenprovide the Agencies with information on theirfunctional needs as well as on the cost andavailability of substitutes. Customers also providerelevant information that they uniquely possess onhow they choose products and suppliers. In someinvestigations, customers provide usefulinformation on how they have responded toprevious significant changes in circumstances. Insome investigations, the Agencies are able toexplore consumer preferences with the aid of priceand quantity data that allow econometricestimation of the relevant elasticities of demand.

Dairy Farmers–SODIAAL (DOJ 2000) TheDepartment challenged the proposedacquisition by Dairy Farmers of America, Inc.of SODIAAL North America Corp. on the basisof likely anticompetitive effects in the sale of“branded stick and whipped butter in thePhiladelphia and New York metropolitanareas.” DFA sold the Breakstone brand, andSODIAAL sold the Keller’s and Hotel Barbrands. The Department concluded thatconsumers of branded butter in thesemetropolitan areas so preferred it over private-label butter, as well as margarine and othersubstitutes, that a hypothetical monopolistover just branded butter in each of those areaswould raise price significantly. Thisconclusion was supported by econometric

evidence, derived from data collected fromsupermarkets, on the elasticity of demand forbranded butter in Philadelphia and New York.The Department’s complaint was resolved bya consent decree transferring the SODIAALassets to a new company not wholly owned byDFA and containing additional injunctiveprovisions.

In the vast majority of cases, the Agencieslargely rely on non-econometric evidence,obtained primarily from customers and frombusiness documents.

Cemex–RMC (FTC 2005) The proposedacquisition of RMC Group PLC by Cemex, S.A.de C.V. would have combined two of the threeindependent ready-mix concrete suppliers inTucson, Arizona. Ready-mix concrete is aprecise mixture of cement, aggregates, andwater. It is produced at local plants anddelivered as a slurry in trucks with revolvingdrums to construction sites, where it is pouredand formed into its final shape. Commissionstaff determined from information receivedfrom customers that a hypothetical monopolistover ready-mix concrete would raise pricesignificantly in the relevant area. Asphalt andother building materials were found not to begood substitutes for ready-mix concrete, due insignificant part to concrete’s pliability whenfreshly mixed and strength and permanencewhen hardened. Concerned that thetransaction likely would result in coordinatedinteraction in the Tucson area, theCommission, pursuant to a consent agreement,ordered Cemex, among other things, to divestRMC’s Tucson-area ready-mix concrete assets.

Swedish Match–National (FTC 2000) SwedishMatch North America, Inc. proposed to acquireNational Tobacco Company, L.P. Theacquisition would have combined the first- andthird-largest producers of loose leaf chewingtobacco in the United States. Commission staffevaluated whether, as the merging firmscontended, moist snuff should be included inthe relevant market for loose leaf chewingtobacco. Swedish Match’s own marketresearch revealed that consumers wouldsubstitute less expensive loose leaf, but notmore expensive snuff, if loose leaf pricesincreased slightly. Additional evidence from

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the firms’ own business documents, andcustomer testimony from distributors thatpurchase and resell the products to retailers,demonstrated that loose leaf chewing tobaccoconstitutes a distinct product market that doesnot include moist snuff. The acquisition wouldtherefore have resulted in a merged firm witha high share of the relevant market for looseleaf chewing tobacco. The Commissionsuccessfully challenged the merger in federaldistrict court.

In determining whether to challenge atransaction, the Agencies do not simply tally thenumber of customers that oppose a transactionand the number of customers that support it. TheAgencies take into account that all customers in arelevant market are not necessarily situatedsimilarly in terms of their incentives. For example,intermediate resellers’ views about a proposedmerger between two suppliers may be influencedby the resellers’ ability profitably to pass along aprice increase. If resellers can profitably passalong a price increase, they may have no objectionto the merger. End-users, by contrast, generallylack such an incentive because they must absorbhigher prices. In all cases, the Agencies creditcustomer testimony only to the extent theAgencies conclude that there is a soundfoundation for the testimony.

Evidence of Effects May Be theAnalytical Starting Point

In some investigations, before havingdetermined the relevant market boundaries, theAgencies may have evidence that more directlyanswers the “ultimate inquiry in merger analysis,”i.e., “whether the merger is likely to create orenhance market power or facilitate its exercise.”Guidelines § 0.2. Evidence pointing directlytoward competitive effects may arise fromstatistical analysis of price and quantity datarelated to, among other things, incumbentresponses to prior events (sometimes called“natural experiments”) such as entry or exit byrivals. For example, it may be that one of themerging parties recently entered and thateconometric tools applied to pricing data showthat the other merging party responded to thatentry by reducing price by a significant amountand on a nontransitory basis while the prices ofsome other sellers that might be in the relevant

market did not.

To be probative, of course, such data analysesmust be based on accepted economic principles,valid statistical techniques, and reliable data.Moreover, the Agencies accord weight to suchanalyses only within the context of the fullinvestigatory record, including information andtestimony received from customers and otherindustry participants and from businessdocuments.

Evidence pertaining more directly to amerger’s actual or likely competitive effects alsomay be useful in determining the relevant marketin which effects are likely. Such evidence mayidentify potential relevant markets andsignificantly reinforce or undermine otherevidence relating to market definition.

Staples–Office Depot (FTC 1997) Staples, Inc.proposed to acquire Office Depot, Inc., amerger that would have combined two of thethree national retail chains of office supplysuperstores. The Commission found that inmetropolitan areas where Staples faced nooffice superstore rival, it charged significantlyhigher prices than in metropolitan areas whereit faced competition from Office Depot or theother office supply superstore chain,OfficeMax. Office Depot data showed asimilar pattern: its prices were lowest whereStaples and OfficeMax also operated, andhighest where they did not. These patternsheld regardless of how many non-superstoresellers of office supplies operated in themetropolitan area under review.

The Commission also found that evidencerelating to entry showed that local rivalry fromoffice supply superstores acted as the principalcompetitive constraint on Staples and OfficeDepot. Each firm regularly dropped prices inareas where they confronted entry by anotheroffice supply superstore, but did not do so inresponse to entry by other sellers of officesupplies, such as Wal-Mart. Newspaperadvertising and other promotional materialslikewise reflected greater price competition inthose areas in which Staples and Office Depotfaced local rivalry from one another or fromOfficeMax. Such evidence provided directsupport for the conclusion that the acquisitionwould cause anticompetitive effects in therelevant product market defined as the sale of

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consumable office supplies through officesupply superstores, in those metropolitan areaswhere Staples and Office Depot competedprior to the merger. The Commissionsuccessfully challenged the merger in federaldistrict court.

In some cases, competitive effects analysis mayeliminate the need to identify with specificity theappropriate relevant market definition, because,for example, the analysis shows thatanticompetitive effects are unlikely in anyplausibly defined market.

Federated–May (FTC 2005) FederatedDepartment Stores, Inc. proposed to acquireThe May Department Stores Co., therebycombining the two largest chains in the UnitedStates of so-called “traditional” or“conventional” department stores .Conventional department stores typicallyanchor enclosed shopping malls, featureproducts in the mid-range of price and quality,and sell a wide range of products. Thetransaction would create high levels ofconcentration among conventional departmentstores in many metropolitan areas of theUnited States, and the merged firm wouldbecome the only conventional departmentstore at certain of the 1,200 malls in the UnitedStates.

If the relevant product market includedonly conventional department stores, thenbefore the merger Federated had a marketshare greater than 90% in the New York–NewJersey metropolitan area. If the relevantproduct market also included, for example,specialty stores, then Federated’s share in thatgeographic area was much smaller. Theevidence that Commission staff obtainedindicated that the relevant product market wasbroader than conventional department stores.For example, in the New York–New Jerseymetropolitan area, Federated chargedconsumers the same prices that it chargedthroughout much of the eastern region of theUnited States, including where Federatedfaced larger numbers of traditional departmentstore rivals. May and other department storechains, like Federated, also set prices toconsumers that were uniform over very broadgeographic areas and did not appear to varylocal prices based on the number or identity of

conventional department stores in malls ormetropolitan areas.

This evidence provided support for theconclusion that the acquisition likely would notcreate anticompetitive effects. Staff also foundno evidence that competitive constraints, e.g.,rivalry from retailers other than departmentstores, in New York–New Jersey were notrepresentative of other markets in whichFederated and May competed. Further,evidence pertaining both to which firms theparties monitored for pricing and to consumerpurchasing behavior also supported theconclusion that the relevant market wassufficiently broad that the merger was notlikely to cause anticompetitive effects. TheCommission closed the investigation.

Industry Usage of the Word“Market” Is Not Controlling

Relevant market definition is, in the antitrustcontext, a technical exercise involving analysis ofcustomer substitution in response to priceincreases; the “markets” resulting from thisdefinition process are specifically designed toanalyze market power issues. References to a“market” in business documents may provideimportant insights into the identity of firms,products, or regions that key industry participantsconsider to be sources of rivalry, which in turnmay be highly probative evidence upon which todefine the “relevant market” for antitrustpurposes. The Agencies are careful, however, notto assume that a “market” identified for businesspurposes is the same as a relevant market definedin the context of a merger analysis. Whenbusinesses and their customers use the word“market,” they generally are not referring to aproduct or geographic market in the precise senseused in the Guidelines, although what they terma “market” may be congruent with a Guidelines’market.

Staples–Office Depot (FTC 1997) In theblocked Staples–Office Depot transactiondescribed above in this Chapter, theCommission alleged, and the district courtfound, that the relevant product market was“the sale of consumable office suppliesthrough office supply superstores,” with“consumable” meaning products that

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consumers buy recurrently, like pens, paper,and file folders. Industry members in theordinary course of business did not describethe “market” using this phrase. The factsshowed that a hypothetical monopolist officesupply superstore would raise pricesignificantly on consumable office supplies.Many retail firms that are not office supplysuperstores—such as discount and generalmerchandise stores—sold consumable officesupplies in areas near the merging firms.Despite the existence of such other sellers,evidence, including the facts identified above,justified definition of the relevant productmarket as one limited to the sale of consumableoffice products solely through office supplysuperstores.

It is unremarkable that “markets” in commonbusiness usage do not always coincide with“markets” in an antitrust context, inasmuch as theterms are used for different purposes. Thedescription of an “antitrust market” sometimesrequires several qualifying words and as suchdoes not reflect common business usage of theword “market.” Antitrust markets are entirelyappropriate to the extent that they realisticallydescribe the range of products and geographicareas within which a hypothetical monopolistwould raise price significantly and in which amerger’s likely competitive effects would be felt.

Waste Management–Allied (DOJ 2003) WasteManagement, Inc. agreed to acquire assetsfrom Allied Waste Industries, Inc. that wereused in its municipal solid waste collectionoperations in Broward County, Florida. TheDepartment challenged the proposedacquisition on the basis of anticompetitiveeffects in “small container commercialhauling.” Commercial haulers serve customerssuch as office buildings, apartment buildings,and retail establishments. Small containershave capacities of 1–10 cubic yards, and wastefrom them is collected using specialized, front-end loading vehicles. The Department foundthat this market was separate and distinct frommarkets for other municipal solid wastecollection services. The Department concludedthat a hypothetical monopolist in just smallcontainer commercial hauling would haveraised prices significantly because it wasuneconomical for homeowners to use the much

larger containers used by commercialcustomers and uneconomical for commercialcustomers using large “roll-off” containers toswitch to small commercial containers. TheDepartment’s challenge to the merger wasresolved by a consent decree requiringdivestiture of specified collection routes andthe assets used on them.

Pacific Enterprises–Enova (DOJ 1998) PacificEnterprises (which owned Southern CaliforniaGas Co.) and Enova Corp. (which owned SanDiego Gas & Electric Co.) agreed to combinethe companies under a common holdingcompany. The Department challenged thecombination on the basis of likelyanticompetitive effects arising from the abilityof the combined companies to raise electricityprices by restricting the supply of natural gas.The Department concluded that the relevantmarket was the sale of electricity in Californiaduring periods of high demand. In high-demand periods, limitations on transmissioncapacity cause prices in California to bedetermined by power plants in California.Inter-temporal arbitrage was infeasible becausethere is only a very limited opportunity tostore electric power. Thus, the Departmentconcluded that a hypothetical electricitymonopolist during just periods of highdemand would raise prices significantly. TheDepartment’s complaint was resolved by aconsent decree requiring divestiture ofgenerating facilities and associated assets.

Market Definition andIntegrated AnalysisMarket Definition Is Linked toCompetitive Effects Analysis

The process of defining the relevant market isdirectly linked to competitive effects analysis. Inanalyzing mergers, the Agencies identify specificrisks of potential anticompetitive harm, anddelineate the appropriate markets within which toevaluate the likelihood of such potential harm.This process could lead to different conclusionsabout the relevant markets likely to experiencecompetitive harm for two similar mergers withinthe same industry.

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Thrifty–PayLess (FTC 1994) A proposedmerger of Thrifty Drug Stores and PayLessDrug Stores would have combined retail drugstore chains with store locations near oneanother in towns in California, Oregon, andWashington. Commission staff identified twopotential anticompetitive effects from themerger: (1) that “cash” customers, i.e.,individual consumers who pay out of pocketfor prescription drugs, likely would pay higherprices; and (2) that third-party payers, such ashealth plans and pharmacy benefit managers(“PBMs”), likely would pay higher dispensingfees to chain pharmacy firms to obtain theirparticipation in provider networks.

Cash customers tend to shop close to homeor place of employment, suggesting smallgeographic markets for those customers.Third-party payers need network participationfrom chains having wide territorial coverage.The staff assessed different relevant marketsfor the two risks of competitive harm. In itscomplaint accompanying a consent agreement,the Commission alleged that the sale ofprescription drugs in retail stores (i.e., sales tocash customers) was a relevant product marketand that anticompetitive effects from themerger were likely in this market. TheCommission did not allege a diminution incompetition regarding the process by whichpharmacies negotiate for inclusion in healthplan provider networks and sought no relief inthat market. The Commission ordered Thrifty,among other things, to divest retail pharmaciesin the geographic markets of concern.

Rite Aid–Revco (FTC 1996) The nation’s twolargest retail drug store chains, Rite Aid Corp.and Revco D.S., Inc., proposed to merge. Theycompeted in many local markets, including in15 metropolitan areas in which the mergedfirm would have had more than 35% of theretail pharmacies. As in the foregoingThrifty–PayLess matter, Commission staffdefined two markets in which harm potentiallymay have resulted: retail sales made to cashcustomers, and sales through PBMs, whichcontract with multiple pharmacy firms to formnetworks offering pharmacy benefits as part ofhealth insurance coverage. Pharmacynetworks often include a high percentage oflocal pharmacies because access to manyparticipating pharmacies is often important to

plan enrollees.

Rite Aid and Revco constrained oneanother’s pricing leverage with PBMs inbargaining for inclusion in PBM networks.Each merging firm offered rival broad localcoverage of pharmacy locations, such thatPBMs could assemble marketable networkswith just one of the firms included. A highproportion of PBM plan enrollees would haveconsidered the merged entity to be theirpreferred pharmacy chain, leaving PBMs withless attractive options for assembling networksthat did not include the merged firm. Thiswould have empowered the merged firmsuccessfully to charge higher dispensing fees asa condition of participating in a network.

Commission staff determined that themerger was likely substantially to lessencompetition in the relevant market of sales toPBMs and similar customers who needed anetwork of pharmacies. The Commissionvoted to challenge the merger, stating that “theproposed Rite Aid-Revco merger is the firstdrug store merger where the focus has been onanticompetitive price increases to the growingnumbers of employees covered by thesepharmacy benefit plans, rather thanexclusively focusing on the cash payingcustomer.” The parties subsequentlyabandoned the deal.

Many mergers, in a wide variety of industries,potentially have effects in more than one relevantgeographic market or product market and requireindependent competitive assessments for eachmarket.

Suiza–Broughton (DOJ 1998) The Departmentchallenged the proposed acquisition ofBroughton Foods Co. by Suiza Foods Corp.Suiza was a nationwide operator of milkprocessing plants with four dairies in Kentuckyand Tennessee. Broughton operated twodairies, including the Southern Belle Dairy inPulaski County, Kentucky. The two companiescompeted in the sale of milk and other dairyproducts to grocery stores, convenience stores,schools, and institutions. The Department’sinvestigation focused on schools, many ofwhich require daily, or every-other-day,delivery. School districts procured the milkthrough annual contracts, each of which the

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Department found to be an entirely separatecompetition. Thus, the Department defined 55relevant markets, each consisting of a schooldistrict in south central Kentucky in which theproposed merger threatened competition. TheDepartment’s complaint was resolved by aconsent decree requiring divestiture of theSouthern Belle Dairy.

NAT, L.C.–D.R. Partners (DOJ 1995) TheDepartment and private plaintiffs challengedthe consummated acquisition of the NorthwestArkansas Times by interests owning thecompeting Morning News of Northwest Arkansas.The Department concluded that the acquisitionlikely would harm subscribers of thesenewspapers as well as local advertisers, anddefined separate relevant markets for readersand local advertisers. The Department foundthat both markets included only dailynewspapers because of unique characteristicsvalued by readers and local advertisers, andconcluded that the acquisition likely wouldharm both groups of customers. The courtsrequired rescission of the acquisition.

Market Definition andCompetitive Effects AnalysesMay Involve the Same Facts

Often the same information is relevant tomultiple aspects of the analysis. For example,regarding mergers that raise the concern that themerged firm would be able to exercise unilateralmarket power, the Agencies often use the samedata and information both to define the relevantmarket and to ascertain whether the merger islikely to have a significant unilateralanticompetitive effect.

General Mills–Pillsbury (FTC 2001) GeneralMills, Inc. proposed to acquire The PillsburyCo. General Mills owned the Betty Crockerbrand of pancake mix and the Bisquick brandof all-purpose baking mix, a product that canbe used to make pancakes as well as otherproducts. Pillsbury owned the Hungry Jackpancake mix brand. An issue was whether therelevant product market for pancake mixesincluded Bisquick. General Mills’ BettyCrocker pancake mix had a relatively smallshare of a candidate pancake mix market thatexcluded Bisquick, suggesting that the merger

likely would not raise significant antitrustconcerns in the candidate pancake mix marketshould the relevant market exclude Bisquick.

In addition to obtaining information fromindustry documents and interviews withindustry participants on the correct contours ofthe relevant product market, FTC staffanalyzed scanner data to address whetherBisquick competed with pancake mixes.Demand estimation revealed significant cross-price elasticities of demand between Bisquickand most of the individual pancake mixbrands, suggesting that Bisquick competed inthe same relevant market as pancake mixes.Merger simulation based on the elasticitiescalculated from the scanner data showed thatif General Mills acquired Pillsbury it likelywould unilaterally raise prices. All of theevidence taken together further confirmed thatPillsbury’s Hungry Jack and Bisquick weresignificant substitutes, and the staff concludedthat the relevant market included both pancakemixes and Bisquick. The parties resolved thecompetitive concerns in this market by sellingPillsbury’s baking product line. NoCommission action was taken.

Interstate Bakeries–Continental (DOJ 1995)The Department challenged Interstate BakeriesCorp.’s purchase of Continental Baking Co.from Ralston Purina Co. on the basis of likelyunilateral effects in the sale of white pan bread.Econometric analysis determined that therewere substantial cross-elasticities of demandbetween the Continental and Interstate brandsof white pan bread. The Department used theestimated cross-elasticities in a mergersimulation, which predicted that the mergerwas likely to result in price increases for thosebrands of 5–10%. The data used to estimatethese elasticities also were used to estimate theelasticity of demand for white pan bread in theaggregate and for just “premium” brands ofwhite pan bread. The latter estimationindicated that the relevant market was nobroader than all white pan bread, despite somelimited competition from other bread productsand other sources of carbohydrates. TheDepartment’s challenge to the proposedmerger was settled by a consent decreerequiring divestiture of brands and relatedassets in the five metropolitan areas.

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Integrated Analysis Takes intoAccount that Defined MarketBoundaries Are Not NecessarilyPrecise or Rigid

For mergers involving relatively homogeneousproducts and distinct, identifiable geographicareas, with no substitute products or locations justoutside the market boundaries, market definitionis likely to be relatively easy and uncontroversial.The boundaries of a market are less clear-cut inmerger cases that involve products or geographicareas for which substitutes exist along acontinuum. The simple dichotomy of “in themarket” or “out of the market” may notadequately capture the competitive interactioneither of particularly close substitutes or ofrelatively distant substitutes.

Even when no readily apparent gap exists inthe chain of substitutes, drawing a marketboundary within the chain may be entirelyappropriate when a hypothetical monopolist overjust a segment of the chain of substitutes wouldraise prices significantly. Whenever the Agenciesdraw such a boundary, they recognize andaccount for the fact that an increase in priceswithin just that segment could cause significantsales to be lost to products or geographic areasoutside the segment. Although these lost salesmay be insufficient to deter a hypotheticalmonopolist from raising price significantly,combined with other factors, they may besufficient to make anticompetitive effects anunlikely result of the merger.

Significance of Concentrationand Market Share Statistics

Section 2 of the Guidelines explains that“market share and concentration data provideonly the starting point for analyzing thecompetitive impact of a merger.” Indeed, theAgencies do not make enforcement decisionssolely on the basis of market shares andconcentration, but both measures neverthelessplay an important role in the analysis. A mergerin an industry in which all participants have lowshares—especially low shares in all plausiblerelevant markets—usually requires no significantinvestigation, because experience shows that suchmergers normally pose no real threat to lessencompetition substantially. For example, if the

merging parties are small producers of ahomogeneous product, operating in a geographicarea where many other producers of the samehomogeneous product also are located, theAgencies may conclude that the merger likelyraises no competition concerns without everdetermining the precise contours of the market.By contrast, mergers occurring in industriescharacterized by high shares in at least oneplausible relevant market usually requireadditional analysis and consideration of factors inaddition to market share.

Section 1.51 of the Guidelines sets out thegeneral standards, based on market shares andconcentration, that the Agencies use to determinewhether a proposed merger ordinarily requiresfurther analysis. The Agencies use theHerfindahl-Hirschman Index (“HHI”), which isthe sum of the squares of the market shares of allmarket participants, as the measure of marketconcentration. In particular, the Agencies rely onthe “change in the HHI,” which is twice theproduct of the market shares of the merging firms,and the “post-merger HHI,” which is the HHIbefore the merger plus the change in the HHI.Section 1.51 sets out zones defined by the HHI andthe change in the HHI within which mergersordinarily will not require additional analysis.Proposed mergers ordinarily require no furtheranalysis if (a) the post-merger HHI is under 1000;(b) the post-merger HHI falls between 1000 and1800, and the change in the HHI is less than 100;or (c) the post-merger HHI is above 1800, and thechange in the HHI is less than 50.

The Agencies’ joint publication of MergerChallenges Data, Fiscal Years 1999–2003 (issuedDecember 18, 2003), and the Commission’spublication of Horizontal Merger InvestigationData, Fiscal Years 1996–2003 (issued February 2,2004 and revised August 31, 2004), document thatthe Agencies have often not challenged mergersinvolving market shares and concentration thatfall outside the zones set forth in Guidelinessection 1.51. This does not mean that the zones arenot meaningful, but rather that market shares andconcentration are but a “starting point” for theanalysis, and that many mergers falling outsidethese three zones nevertheless, upon fullconsideration of the factual and economicevidence, are found unlikely substantially tolessen competition. Application of the Guidelinesas an integrated whole to case-specific facts—not

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undue emphasis on market share andconcentration statistics—determines whether theAgency will challenge a particular merger. Asdiscussed in section 1.521 of the Guidelines,historical market shares may not reflect a firm’sfuture competitive significance.

Boeing–McDonnell Douglas (FTC 1997) TheBoeing Co., the world’s largest producer oflarge commercial aircraft with 60% of thatmarket, proposed to acquire McDonnellDouglas Corp., which through DouglasAircraft had a share of nearly 5% in thatmarket. Airbus S.A.S. was the only othersignificant rival, and obstacles to entry wereexceptionally high. Although McDonnellDouglas was not a failing firm, staffdetermined that McDonnell Douglas’significance as an independent supplier ofcommercial aircraft had deteriorated to thepoint that it was no longer a competitiveconstraint on the pricing of Boeing and Airbusfor large commercial aircraft. Manypurchasers of aircraft indicated that McDonnellDouglas’ prospects for future aircraft saleswere close to zero. McDonnell Douglas’decline in competitive significance stemmedfrom the fact that it had not made thecontinuing investments in new aircrafttechnology necessary to compete successfullyagainst Boeing and Airbus. Staff’sinvestigation failed to turn up any evidencethat this situation could be expected to bereversed. The Commission closed theinvestigation without taking any action.

Indeed, market concentration may beunimportant under a unilateral effects theory ofcompetitive harm. As discussed in more detail inChapter 2’s discussion of Unilateral Effects, thequestion in a unilateral effects analysis is whetherthe merged firm likely would exercise marketpower absent any coordinated response from rivalmarket incumbents. The concentration of theremainder of the market often has little impact onthe answer to that question.

http://www.ftc.gov/opa/1997/07/boeing.htm

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2. The Potential AdverseCompetitive Effects of Mergers

Section 2 of the Guidelines identifies two broadanalytical frameworks for assessing whether amerger between rival firms may substantiallylessen competition: “coordinated interaction” and“unilateral effects.” A horizontal merger is likelyto lessen competition substantially throughcoordinated interaction if it creates a likelihoodthat, after the merger, competitors wouldcoordinate their pricing or other competitiveactions, or would coordinate them morecompletely or successfully than before the merger.A merger is likely to lessen competitionsubstantially through unilateral effects if it createsa likelihood that the merged firm, without anycoordination with non-merging rivals, would raiseits price or otherwise exercise market power to agreater degree than before the merger.

Normally, the likely effects of a merger withina particular market are best characterized as eithercoordinated or unilateral, but it is possible to haveboth sorts of competitive effects within a singlerelevant market. This possibility may be mostlikely if the coordinated and unilateral effectsrelate to different dimensions of competition orwould manifest themselves at different times.

Although these two broad analyticalframeworks provide guidance on how theAgencies analyze competitive effects, theparticular labels are not the focus. What mattersis not the label applied to a competitive effectsanalysis, but rather whether the analysis is clearlyarticulated and grounded in both soundeconomics and the facts of the particular case.These frameworks embrace every competitiveeffect of any form of horizontal merger. TheAgencies do not recognize or apply narrowreadings of the Guidelines that could causeanticompetitive transactions to fall outside of, orfall within a perceived gap between, the

coordinated and unilateral effects frameworks.

In evaluating the likely competitive effects of aproposed merger, the Agencies assess the fullrange of qualitative and quantitative evidenceobtained from the merging parties, theircompetitors, their customers, and a variety ofother sources. By carefully evaluating thisevidence, the Agencies gain an understanding ofthe setting in which the proposed merger wouldoccur and how best to analyze competition. Thisunderstanding draws heavily on the qualitativeevidence from documents and first-handobservations of the industry by customers andother market participants. In some cases, thisunderstanding is enhanced significantly byquantitative analyses of various sorts. One type ofquantitative analysis is, as explained in Chapter 1,the “natural experiment” in which variation inmarket structure (e.g., from past mergers) can beempirically related to changes in marketperformance.

The Agencies examine whatever evidence isavailable and apply whatever tools of economicswould be productive in an effort to arrive at themost reliable assessment of the likely effects ofproposed mergers. Because the facts of mergerinvestigations commonly are complex, some bitsof evidence may appear inconsistent with theAgencies’ ultimate assessments. The Agencieschallenge a merger if the weight of the evidenceestablishes a likelihood that the merger would beanticompetitive. The type of evidence that is mosttelling varies from one merger to the next, as dothe most productive tools of economics.

In assessing a merger between rival sellers, theAgencies consider whether buyers are likely ableto defeat any attempts by sellers after the mergerto exercise market power. Large buyers rarely cannegate the likelihood that an otherwise

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anticompetitive merger between sellers wouldharm at least some buyers. Most markets withlarge buyers also have other buyers against whichmarket power can be exercised even if some largebuyers could protect themselves. Moreover, evenvery large buyers may be unable to thwart theexercise of market power.

Although they generally focus on the likelyeffects of proposed mergers on prices paid byconsumers, the Agencies also evaluate the effectsof mergers in other dimensions of competition.The Agencies may find that a proposed mergerwould be likely to cause significantanticompetitive effects with respect to innovationor some other form of non-price rivalry. Sucheffects may occur in addition to, or instead of,price effects.

The sections that follow address in greaterdetail the Agencies’ application of the Guidelines’coordinated interaction and unilateral effectsframeworks.

Coordinated InteractionA horizontal merger changes an industry’s

structure by removing a competitor andcombining its assets with those of the acquiringfirm. Such a merger may change the competitiveenvironment in such a way that the remainingfirms—both the newly merged entity and itscompetitors—would engage in some form ofcoordination on price, output, capacity, or otherdimensions of competition. The coordinatedeffects section of the Guidelines addresses thispotential competitive concern. In particular, theAgencies seek to identify those mergers that arelikely either to increase the likelihood ofcoordination among firms in the relevant marketwhen no coordination existed prior to the merger,or to increase the likelihood that any existingcoordinated interaction among the remainingfirms in the relevant market would be moresuccessful, complete, or sustainable.

A merger could reduce competitionsubstantially through coordinated interaction andrun afoul of section 7 of the Clayton Act withoutan agreement or conspiracy within the meaning ofthe Sherman Act. Even if a merger is likely toresult in coordinated interaction, or moresuccessful coordinated interaction, and violatessection 7 of the Clayton Act, that coordination,depending on the circumstances, may not

constitute a violation of the Sherman Act. Assection 2.1 of the Guidelines states, coordinatedinteraction “includes tacit or express collusion,and may or may not be lawful in and of itself.”

Most mergers have no material effect on thepotential for coordination. Some may even lessenthe likelihood of coordination. To identify thosemergers that enhance the likelihood oreffectiveness of coordination, the Agenciestypically evaluate whether the industry in whichthe merger would occur is one that is conducive tocoordinated behavior by the market participants.The Agencies also evaluate how the mergerchanges the environment to determine whetherthe merger would make it more likely that firmssuccessfully coordinate.

In conducting this analysis, the Agenciesattempt to identify the factors that constrain rivals’ability to coordinate their actions before themerger. The Agencies also consider whether themerger would sufficiently alter competitiveconditions such that the remaining rivals after themerger would be significantly more likely toovercome any pre-existing obstacles tocoordination. Thus, the Agencies not only assesswhether the market conditions for viablecoordination are present, but also ascertainspecifically whether and how the merger wouldaffect market conditions to make successfulcoordination after the merger significantly morelikely. This analysis includes an assessment ofwhether a merger is likely to foster a set ofcommon incentives among remaining rivals, aswell as to foster their ability to coordinatesuccessfully on price, output, or other dimensionsof competition.

Successful coordination typically requiresrivals (1) to reach terms of coordination that areprofitable to each of the participants in thecoordinating group, (2) to have a means to detectdeviations that would undermine the coordinatedinteraction, and (3) to have the ability to punishdeviating firms, so as to restore the coordinatedstatus quo and diminish the risk of deviations.Guidelines § 2.1. Punishment may be possible, forexample, through strategic price-cutting to thedeviating rival’s customers, so as effectively toerase the rival’s profits from its deviation andmake the rival less likely to “cheat” again.Coordination on prices tends to be easier the moretransparent are rivals’ prices, and coordinationthrough allocation of customers tends to be easier

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the more transparent are the identities ofparticular customers’ suppliers. It may berelatively more difficult for firms to coordinate onmultiple dimensions of competition in marketswith complex product characteristics or terms oftrade. Such complexity, however, may not affectthe ability to coordinate in particular ways, suchas through customer allocation. Under Guidelinesanalysis, likely coordination need not be perfect.To the contrary, the Agencies assess whether, forexample, it is likely that coordinated interactionwill be sufficiently successful following the mergerto result in anticompetitive effects.

LaFarge–Blue Circle (FTC 2001) A merger ofLaFarge S.A. and Blue Circle Industries PLCraised coordinated interaction concerns inseveral relevant markets, including that forcement in the Great Lakes region. In thatmarket, the merger would have created a firmwith a combined market share exceeding 40%and a market in which the top four firmswould control approximately 90% of thesupply. The post-merger HHI would havebeen greater than 3,000, with a change in theHHI of over 1,000. Cement is widely viewedas a homogeneous, highly standardizedcommodity product over which producerscompete principally on price. Industrypractice was that suppliers informed customersof price increases months before they were totake effect, making prices across rival suppliersrelatively transparent.

Sales transactions tended to be frequent,regular, and relatively small. These factorsheightened concern that, after the merger,incumbents were not only likely to coordinateprofitably on price terms, but also that thefirms would have little incentive to deviatefrom the consensus price. That possibilityexisted because the profit to be gained fromdeviation would be less than the potentiallosses that would result if rivals retaliated. TheCommission challenged the merger, resolvingit by a consent order that required, amongother things, divestiture of cement-relatedassets in the Great Lakes region.

R.J. Reynolds–British American (FTC 2004) Ina merger of the second- and third-largestmarketers of cigarettes, R.J. Reynolds TobaccoHoldings, Inc. proposed to acquire Brown &Williamson Tobacco Corporation from British

American Tobacco plc. Within the market forall cigarettes, the merger would have increasedthe HHI from 2,735 to 3,113. The Commissionassessed whether the cigarette market wassusceptible to coordinated interaction.Concluding that “the market for cigarettes issubject to many complexities, continualchanges, and uncertainties that would severelycomplicate the tasks of reaching andmonitoring a consensus,” the Commissionclosed the investigation without challengingthe merger. The Commission’s closingstatement points to the high degree ofdifferentiation among cigarette brands, as wellas sizable variation in firm sizes, productportfolios, and market positions among themanufacturers as factors that created differentincentives for the different manufacturers toparticipate in future coordination. Thesefactors made future coordination more difficultto manage and therefore unlikely.

Both RJR and Brown & Williamson hadportfolios of cigarette brands that included asmaller proportion of strong premium brandsand a larger proportion of vulnerable anddeclining discount brands than the other majorcigarette competitors. At the time of themerger, both companies were investing ingrowing a smaller number of premium equitybrands to maintain sales and market share.There was uncertainty about the results ofthese strategic changes. The Commissionconcluded that uncertainties of these typesgreatly increased the difficulty of engaging incoordinated behavior. The Commission alsonoted that competition in the market wasdriven by discount brands and by equityinvestment in select premium brands amongthe four leading rivals, and there was littleevidence that Brown & Williamson’s continuedautonomy was critical to the preservation ofeither form of competition. Brown &Williamson had been reducing, not increasing,its commitment in the discount segment, andwas a very small factor in equity brands.

The Commission also described variationsin the marketing environment for cigarettesfrom state to state and between rural andurban areas. These variations made it moredifficult and costly for firms to monitor theirrival’s activities and added to the complexityof coordination.

http://www.ftc.gov/opa/2004/06/batrjr.htmhttp://www.ftc.gov/opa/2001/06/lafarge.htm

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Coordination that reduces competition andconsumer welfare could be accomplished usingmany alternative mechanisms. Coordinatedinteraction can occur on one or more competitivedimensions, such as price, output, capacity,customers served, territories served, and newproduct introduction. Coordination on price andcoordination on output are essentially eq