FTC Staff Comment Before the National Association of Attorneys General Concerning Proposed Horizontal Merger Guidelines

FEDERAL TRADE COMMISSION
WASHINGTON. DoC. 20580
., ..
-u:' 	.~ .:~; I'; A::;rliJiE t::
?S7L{ 03 S- 	'.0.'
OFFICE OF
THE CHAIRMAN
Lloyd Constantine, 	Esquire
Assistant Attorney General 	in Charge
Antitrust 	Bureau
state 	of New York Department 	of 	Law
120 	Broadway
New York, 	New York 	10271
Dear Mr. 	Constantine:
The 	Federal 	Trade 	Commission 	appreciates 	our having 	been -.'
afforded an 	opportunity to comment upon the 	proposed Horizontal
Merger Guidelines 	of 	the 	National 	Association 	of Attorneys
General 	("HAAG 	Guidelines" 	or 	"Guidelines"). 	We 	also 	thank you
for 	g~anting us 	an 	extension of time 	in which 	to 	comment.
We 	have 	two 	principal 	concerns with 	the proposed HAAQ
Guid~lines. 	We 	believe 	that 	the HAAG Guidelines 	do 	not
adequately 	take 	into 	account 	the dynamic 	nature 	of 	competition,
and 	the 	ability 	of market 	forces 	to 	forestall 	most 	attempts 	to
restrict 	output 	and 	elevate 	prices 	to 	the detriment 	of consumers.
In 	particular, 	the 	Guidelines 	tend to 	define markets 	so narrOWly
that 	applying 	them will 	often overstate the 	degree 	of market
power that 	the merged 	firm will 	possess.
Second, 	the HAAG Guidelines 	place more 	emphasis 	on market
share 	data 	than we 	believe 	is warranted. 	As 	the Supreme 	Court
has 	cautioned, 	"statistics concerning market 	share 	and
concentration, 	while 	of great significance, 	(are] 	not 	conclusive
indicators 	of 	anticompetitive 	effects." 	united 	states v. 	General
Dynamics 	Corp., 	415 U.S. 	486, 	498 	(1974). 	These 	statistics 	are
"the primary 	index of market power; 	but 	only a 	further
examination 	of 	the 	particular market -- 	its 	structure, 	history
and 	probable 	future 	-- 	can provide the 	appropriate 	setting 	for
jUdging 	the 	probable 	anticompetitive 	effect 	of 	the merger."
Brown 	Shoe 	Co. 	v. 	United 	States, 	370 U.S. 	294, 	322 	n.38 	(1962).
By 	overemphasizing these 	statistics, 	the HAAG Guidelines 	do 	not
adequately 	address 	the 	standard established by 	the 	Congress when
it 	enacted Section 7: 	whether 	"the effect 	of 	••• 	(an]
acquisition may be 	substantially to 	lessen competition, 	or 	to
tend to 	create 	a 	monopoly." 	As 	a 	result, 	the 	Guidelines 	are
inconsistent with most 	recent case 	law 	interpreting Section 	7 	of
the 	Clayton Act, 	and may 	have 	the 	potential 	to 	harm consumers.
We 	discuss 	these 	concerns 	in 	greater detail 	below.

Lloyd 	Constantine, 	Esquire 	-- 	Page 	2
Market 	Definition
We 	endorse 	the 	HAAG 	Guidelines' 	focus 	(at 	page 	3) 	on
"prevent [ing] 	firms 	from 	attaining market 	or monopoly power."
The 	Commission believes, 	however, 	that 	the 	Guidelines 	take 	too
limited 	a 	view 	of 	both 	the 	substitute products 	and 	alternative
sources 	of 	supply 	available 	to consumers. 	If 	the markets 	defined
are too 	narrow, 	as may 	often be 	the 	case under 	the 	Guidelines
approach, 	the 	degree 	of market 	power that 	the merging 	firms 	will
possess 	after 	a 	merger will 	be overstated, 	although, 	in 	some
cases, 	narrow market definition might understate market power.
We 	believe 	that 	the 	proposal 	to 	exclude a 	product 	from 	the market
unless 	it 	is 	(1) 	comparable 	in price to the 	provisionally
identified product 	and 	(2) 	at 	least 7S 	percent 	of consumers deem
it 	to 	be 	a 	functional 	substitute 	for 	the product 	of 	the merging
firms 	would 	tend 	to 	eliminate 	substitute products 	and 	alternative
sourc~s of 	supply 	from 	a 	market. 1 	Both of 	these 	criteria 	are
inconsistent with 	a 	central 	tenet 	of economics:' 	consumers make
decisions 	at 	the margin.
Regarding 	the 	price 	criterion, 	the 	Guidelines 	state that 	"a
functionally 	suitable substitute which 	is 	significantly more
expensive than the 	relevant product will 	not 	discipline 	an
exercise 	of market power until 	the 	price 	of 	the 	relevant product
has, been 	raised 	to 	a 	level 	comparable to 	the substitute." 	~
Guidelines 	at 	12 	n.22. 	But every product 	(and 	service) 	is 	a
bundle 	of 	characteristics, 	including quality, 	service and
convenience, 	as 	well 	as price. 	Many consumers 	choose 	a 	lower-
priced product because the 	additional 	benefits 	of 	the 	"deluxe"
alternative 	are 	"not worth" 	the higher price. 	If, 	however, 	the
price differential 	between the 	"standard" 	and 	"deluxe" 	models
narrows, 	at 	least some 	consumers 	will 	decide 	that 	the 	extra
features 	of the 	"deluxe" 	model 	are worth the 	higher price. 	Even
a 	product that 	differs 	significantly 	in price may therefore
constrain the 	exercise 	of market 	power.
We 	believe that 	all 	actual 	and potential 	sources 	of 	supply
that may 	emerge 	in 	response 	to a 	anticompetitive 	price 	increase
should be 	included 	in 	the 	relevant market. 	Demand elasticity 	is
1 	We 	agree 	that 	"hard evidence" 	is 	desirable 	and 	that
self-interested speCUlation and unsubstantiated predictions
should be 	rejected. 	The 	Guidelines' 	requirement 	for 	"hard
evidence" 	in market 	definition, 	that 	actual 	substitution has
occurred, 	however, 	may eliminate 	from 	the market 	substitute
products 	that 	could 	constrain 	the 	exercise 	of market power.
Particularly 	if 	the 	market has 	been 	competitive, 	purchasers may
have 	had 	no 	reason 	to 	change 	their 	current buying 	habits,
although 	they may be 	quick to 	do 	so 	in 	the 	future 	in 	response 	to
a 	price 	increase.

Lloyd 	constantine, 	Esquire 	-- 	Page 	3
therefore 	critical 	to 	proper market definition. 	Although 	precise
supply 	and demand 	elasticities are 	difficult 	to 	estimate,
imperfect 	estimates 	are 	likely 	to yield better 	results 	than
untested 	rules 	of 	thumb. 	For these 	reasons, 	the 	Commission
believes 	that 	the 	tests 	established by the 	Department 	of Justice
Merger 	Guidelines 	are 	likely 	to yield more 	accurate 	results 	than
the 	75 	percent 	criterion 	of 	the HAAG Guidelines. 	For 	example,
the 	HAAG 	Guidelines' 	market definition methodically might well
put 	General 	Motors 	and 	Toyota 	automobiles 	in 	separate markets, 	a
result 	that 	seems 	inconsistent with 	the vigorous 	competition
between 	these 	products. 	If 	small 	percentages 	of 	customers 	switch
to 	alternative 	products 	in 	response to 	a 	price 	increase, 	the
overall 	effect may make 	any 	attempt 	at 	a 	price 	increase
unprofitable. 	In 	addition, 	the 	incentive to 	attempt 	to 	exercise
market 	power 	is 	best measured 	by the 	amount 	of 	consumption 	lost
due 	to 	a 	significant price 	increase, 	not 	the 	number 	of 	customers,
especially 	in 	input markets 	where 	buyers 	differ 	in 	size.
Emphasis 	on 	structural 	Measures
We 	believe 	that merger 	analysis 	should 	consider a 	variety 	of
factors 	in 	addit~on to 	concentration data 	to 	assess 	whether 	a
merger will 	increase 	the 	likelihood 	that 	firms 	will 	be 	able 	to
increase 	prices 	to 	consumers. 	Entry conditions, 	for 	example, 	are
a 	critical 	factor, 	as 	the proposed Guidelines 	recognize •
. Guidelines 	at 	Section 5.1; 	see 	also United 	states v. 	Waste
Management. 	Inc., 	743 	F.2d 	976, 	981-84 	(2d Cir. 	1984). 	We
believe 	that the 	key 	question 	regarding 	entry 	is whether 	entry,
or the 	threat 	of 	entry, 	will 	make 	it unprofitable 	for 	firms 	in 	a
market 	to 	exercise their market power. 	If 	entry can be
sufficiently 	rapid, 	and 	the 	competitive effects 	of 	entry would be
SUfficiently 	long 	lasting, 	the 	threat 	of 	entry 	serves 	to 	deter
pr~ce increases, 	even 	in 	the 	short term. 	For this 	reason, 	the
entry 	standard proposed by the 	Guidelines, 	which would 	limit
consideration 	of potential 	entrants to 	those 	likely to 	accomplish
easy 	and meaningful 	entry within one year, 	may have 	the 	effect 	of
including 	only 	those 	firms 	already 	in the market and 	excluding
potential 	entrants 	that would 	constrain the 	exercise 	of market
power. 	Many 	other 	factors 	are 	relevant 	to 	this 	question, 	whether
a 	merger will 	increase 	the 	likelihood 	that 	firms 	will 	be 	able 	to
increase 	prices 	to 	consumers 	by explicitly 	or tacitly 	collUding.
See. 	e.g., 	R. 	Posner, 	Antitrust 	Law: 	An 	Economic 	Perspective 	56-
70 	(1977). 	Below we 	consider 	only 	a 	few 	of 	the 	other
determinants. 	We 	believe 	the 	HAAG 	Guidelines 	should explicitly
and 	meaningfully 	consider 	each 	of 	them, 	as 	well 	as 	the 	other
factors 	cited 	in 	the 	1982 	Statement 	of 	the 	Federal 	Trade
Commission 	Concerning 	Horizontal 	Mergers 	and 	in 	the 	Merger
Guidelines 	of 	the 	u.s. 	Department 	of Justice.

Lloyd 	constantine, 	Esquire 	-- 	Page 	4
Another 	factor 	is 	the 	relationship 	among 	the 	firms 	in 	the
industry. 	For 	example, 	in 	finding 	two hospitals 	acquisitions
illegal, 	the 	Commission 	cited the 	tradition 	of 	cooperation among
the hospitals 	in 	the 	local 	market. 	Hospital 	Corp. 	of America,
106 	F.T.C. 	361, 	500-01 	(1985). 	In 	affirming 	our decision, 	the
Seventh 	Circuit 	observed 	that 	"a market 	in which 	competitors 	are
unusually disposed to 	cooperate 	is 	a 	market 	prone 	to 	collusion."
Hospital 	Corp. 	of America 	v. 	FTC, 	1986-2 	Trade 	Cas. 	(CCH) 	Para.
67,377, 	at 	61,992 	(7th 	Cir.).
A third 	factor 	is 	the 	homogeneity 	of 	the 	relevant 	product.
Firms 	will 	find 	it 	easier to 	reach 	an 	anticompetitive consensus
regarding products 	that 	are 	similar. 	In 	contrast, 	they may 	find
it 	quite 	difficult 	to 	agree 	on 	prices 	for 	products 	that 	differ 	in
quality 	or 	for 	product 	lines 	containing many 	distinct products.
We 	appreciate 	the 	difficulty 	of 	assessing 	each 	of 	these
factqrs 	(and 	the many 	other 	factors) 	individually, 	and 	then
considering 	them together to 	evaluate 	the 	likelihood 	that 	a
merger might 	lead to 	collusion 	(of 	the 	exercise 	of market power
by 	a 	dominant 	firm). 	We 	also 	appreciate 	the 	values 	of
"predictability" 	and 	"consistency of 	enforcement." 	NAAG
Guidelines 	at 	26. 	On balance, 	however, 	we 	believe 	that 	basing
merger 	enforcement 	primarily 	on 	concentration 	levels 	will 	result
in 	challenges 	to mergers 	that 	are 	either beneficial 	to 	consumers
or benign. 	We 	believe we 	can best 	serve the 	public 	interest by
undertaking 	a 	careful 	evaluation 	of the 	likely 	consequences 	of
each merger, 	and 	thus 	satisfying the 	Supreme 	Court's 	direction
that we 	examine 	"the particular market 	-- 	its 	structure, 	history
and probable 	future." 	Brown 	Shoe 	Co., 	370 	U.S. 	at 	322 	n.38;
qccord, 	General 	Dynamics, 	415 	U.S. 	at 	498.
The 	Law
t 	The 	NAAG Guidelines, 	by 	emphasizing 	structural 	data 	over
other 	economic 	evidence, 	differ 	from 	the 	approach 	to 	Section 7
taken 	in most 	recent 	cases. 	The Supreme 	Court

Lloyd 	constantine, 	Esquire 	-- 	Page 	5
has 	not 	addressed 	substantive merger 	law 	in 	over a 	decade, 	but
its 	last pronouncements 	on 	the 	sUbject 	signaled the 	importance 	of
looking beyond 	the 	structural 	evidence 	to 	other economic 	evidence
in 	assessing 	the probable 	competitive 	effects 	of 	a 	merger.
United 	states 	v. 	General 	Dynamics 	Corp., 	415 	U.S. 	486
(1974) (allowing 	a 	merger 	of 	two 	coal 	producers, 	despite 	showing
of 	high 	market 	shares 	and high 	concentration, 	because 	"other
pertinent 	factors" 	indicated 	that 	acquired 	firm's 	market 	share
overstated 	its 	competitive 	significance); 	United 	states 	v.
citizens 	& 5. 	Nat'l 	Bank, 	422 	U.S. 	86 	(1975) (permitting
consolidation 	of 	several 	banks 	in Atlanta 	because 	evidence 	showed
little 	or 	no 	effect 	on competition, 	even though 	concentration and
the market 	share 	of 	the 	acquiring 	bank 	in the 	relevant market
were 	both 	high). 	Moreover, 	other decisions 	over the 	past 	several
years 	in closely 	related 	areas 	have 	underscored 	the 	Court's
preference 	for 	more 	flexible 	analysis, 	taking 	into 	account 	a
broad 	range 	of 	economic 	evidence, 	rather than 	relying on more
rigi~ decision 	rules. 	See. 	e.g., 	continental 	T.V. 	v. 	GTE
Sylvania. 	Inc., 	433 	U.S. 	36 	(1977) (overturning ~ ~ 	rule
against 	non-price vertical 	restraints); 	Broadcast Music. 	Inc. 	v.
Columbia 	Broadcasting 	System, 	Inc., 	441 	U.S. 	1 	(1979) (permitting
horizontal 	agreement 	relating 	to 	pricing 	of 	copyright materials) ;
NCAA v. 	Board 	o~ Regents 	of 	the 	University 	of 	Oklahoma, 	468 	U.S.
85 	(1984) (rule 	of 	reason 	applied 	to 	horizontal 	agreement 	to
restrict 	output); 	Jefferson 	Parish 	Hospital 	District 	No.2 	v.
~, 	466 	U.S. 	2 	(1984) (holding 	that, 	in 	a 	tying 	case, 	"the
character 	of 	demand" 	rather than 	the 	"functional 	relationship"
should 	determine whether there 	are 	two 	products 	or 	one). 	In
contrast with 	the NAAG Guidelines' 	strict 	reliance 	on 	structural
criteria, 	and 	consistent with 	the 	clear trend in Supreme 	Court
jurisprudence, 	the 	lower courts have 	"shown 	a 	greater willingness
to 	consider 	additional 	economic 	evidence." 	~ ABA Antitrust
Section, 	Monograph 	No. 	12, 	Horizontal 	Mergers: 	Law 	and 	Policy
170-71 	(1986) 	and 	cases 	cited therein. 	See 	also 	FTC v. 	PPG
Industries. 	Inc., 	798 	F.2d 	1500 	(D.C. 	Cir. 	1986); 	Hospital 	Corp.
of 	America 	v. 	FTC, 	1986-2 	Trade 	Cas. 	(CCH) 	Para. 	67,377 	(7th
Cir.).

Lloyd 	Constantine, 	Esquire 	-- 	Page 	6
In 	sum, 	we 	are 	concerned 	that 	application 	of 	the HAAQ
Guidelines 	will 	tend 	to 	overstate 	the 	probability 	that 	a 	merger
will 	have 	substantial 	anticompetitive 	effects, 	and 	to 	block
mergers 	that 	have 	the 	potential 	to 	lower prices 	to 	consumers. 2
Therefore, 	we 	suggest 	that NAAG 	consider modifying 	its 	draft
Guidelines 	along 	the 	lines 	outlined 	in 	this 	letter.
By 	direction 	of 	the 	Commission. 	The 	separate 	views 	of
Commissioners 	Bailey 	and 	Azcuenaga 	are 	attached.
~.~ 	();/~
Daniel 	Oliver
Chairman
2 	We 	are 	concerned 	that 	the 	Guidelines 	do 	not 	appear
SUfficiently to 	recognize 	the 	importance 	of 	efficiencies 	from
mergers. 	While 	potential 	wealth 	transfers 	from 	mergers may 	be 	an
important 	concern 	of 	Section 	7, 	there 	is 	also 	a 	considerable
literature 	that 	argues 	that 	Congress 	considered 	the 	promotion 	of
efficiency 	as 	an 	important 	goal 	of 	the 	antitrust 	laws, 	and 	that
efficiencies 	are 	a 	major 	benefit 	of many 	mergers. 	See. 	e.g.,
calvani, 	Consumer Welfare 	Is 	Prime 	Objective 	of 	Antitrust, 	Legal
Times, 	Dec. 	24-31, 	1984, 	at 	14; 	R. 	Bork, 	The 	Antitrust 	Paradox
50-71 	(1978).

FEDERAL TRADE COMMISSION
WASHINGTON. D. C. 20580
Of:JICI 0' THI CO....ISSIO.. I"
March 	6, 	1987
Lloyd 	Constantine, 	Esquire
Assistant Attorney 	General-in-Charge
Antitrust 	Bureau
State 	of 	New 	York 	Department 	of 	Law
120 	Broadway
New 	York, 	New 	York 	10271
Dear 	Mr. 	Constantine:
The 	Federal 	Trade 	Commission 	has 	responded 	to 	your 	request
for 	comments 	on 	the 	Horizontal 	Merger 	Guidelines 	of 	the 	National
Association 	of 	Attorneys 	General. 	You 	previously 	received 	a
separate 	letter 	from 	Chairman 	Oliver. 	Because 	I 	do 	not 	fully
agree 	with 	either 	letter, 	I 	offer 	a 	somewhat 	different
perspe~tive
The 	NAAG 	Guidelines 	seem 	to 	emphasize 	a 	strong 	market-
structure 	approach 	to 	prosecutoria1 	decision-making. 	The 	Supreme
Court 	has 	not 	directly 	dealt 	with 	this 	market-structure 	issue
since 	its 	1974 	decision 	in 	General 	Dynamics. 	However, 	as 	the
Chairman's 	letter 	notes, 	some 	recent 	lower 	Court 	decisions 	such
as 	Waste 	Management 	(1984) 	and 	Calmar 	(1985) 	indicate 	that
additional 	economic 	analysis 	is 	finding 	its 	way 	into 	Section 	7
cases. 	There 	are, 	however, 	equally 	recent 	opinions 	that 	point 	to
a 	continuing 	emphasis 	on market 	structure 	as 	the 	primary 	factor
in 	analyzing 	horizontal 	mergers. 	The 	Court 	of 	Appeals 	in Monfort
v. 	Cargill, 	761 	F.2d 	570 	(10th 	Cir. 	1985), 	relied 	primarily 	on
market 	structure 	in 	finding 	a 	merger 	presumptively 	unlawful.*
See 	also 	FTC 	v. 	Coca 	Cola, 	1986-2 	CCH 	'67,208 	(D.D.C. 	1986).
;. 	In my 	own 	view, 	the 	Courts 	should 	take 	account 	of 	a 	variety
of 	factors 	other 	than 	market 	shares. 	The 	1982 	Statement 	of 	the
Federal 	Trade 	Commission 	Concerning 	Horizonal 	Mergers 	provides
information 	in 	this 	regard, 	as 	do Commission 	decisions 	in 	Section
7 	cases 	since 	1982, ~ e.g., 	Hospital 	Corporation 	of 	America,
Docket 	No. 	9161,101 	FTC 	361 	(1985), 	affirmed 	1986-2 CCH 	,67,377
(7th 	Cir. 	1986).
* 	The 	decision, 	of 	course, 	no 	longer 	can 	be 	cited 	as
precedent. 	However, 	the 	Supreme 	Court 	reversed 	on 	other
grounds 	and 	did 	not 	reject 	the 	lower 	court's 	reasoning.
Therefore, 	it 	is 	reasonable 	to 	suppose 	that 	the 	Tenth 	Circuit
would 	rely 	primarily on 	market 	structure 	in 	its 	next
horizontal 	meroer 	case.

Mr. 	Lloyd 	Constantine 	Page 	- 	2 -
At 	bottom, 	of 	course, 	the 	differences 	between 	the NAAG
Guidelines 	and 	the 	Commission's 	Statement 	reflect 	differences 	in
opinion 	among 	public 	officials 	in 	the 	reasonable 	exercise 	of
discretion. 	I 	look 	forward 	to 	continued 	discussions 	with 	NAAG
about 	matters 	of 	common 	interest.
Patricia 	P. 	Bailey
Commissioner
"

UNITI.:!) STATeS OF AMI.:I(I(;A
FEDERAL TRADE COMMISSION
WASHIN(iTON. 1).<':' 2ll5K(J
()F~ICE o~
T01E cO......'SS'ONER
March 	6, 	1987
Lloyd 	Constantine, 	Esquire
Assistant 	Attorney General 	in Charge
Antitrust Bureau
State 	of 	New 	York 	Department 	of 	Law
120 Broadway
New 	York, 	New 	York 	10271
Dear 	Mr. 	Constantine:
Thank 	you 	for 	the 	invitation, 	extended 	to 	the 	Federal 	Trade
Commission, 	to 	comment 	on 	the 	draft 	of 	the 	proposed 	Horizontal
Merger,Guidelines 	of 	the 	National 	Association of 	Attorneys
General 	(RNAAG 	Guidelines R). 	Because my 	views 	differ 	in 	some
respects 	from 	the 	comment 	submitted' by 	the 	Commission, 	I 	submit
this 	letter 	as 	a 	separate 	comment 	on 	the 	proposed 	NAAG
Guidelines.
I 	have 	several 	concerns 	with 	the 	present 	draft 	of 	the 	NAAG
Guidelines. 	In 	particular, 	it 	appears 	that 	the 	Guidelines 	rely
on 	standards 	for 	market 	definition 	that 	will 	tend 	to 	define
markets 	that 	are 	inappropriately 	narrow, 	which 	may 	result 	either
in 	challenges 	to 	beneficial 	mergers 	or 	in 	failure 	to 	challenge
anticompetitive mergers. 	I 	am 	also 	concerned 	that 	the 	Guidelines
may 	be 	interpreted 	to 	eliminate 	the 	·safe 	harbor" 	for 	mergers
th~t 	is 	established 	in 	the 	Department 	of 	Justice 	Merger
Guidelines. 	In addition, 	the 	draft NAAG 	Guidelines 	depart
somewhat 	from 	the 	Department 	of 	Justice 	guidelines 	in 	assessing
the 'likelihood 	of 	entry 	and 	may 	understate 	the 	role 	of 	entry 	in
deterring 	anticompetitive 	behavior. 	Finally, 	the 	draft
guidelines 	appear 	to 	omit 	consideration of 	several 	important
factors 	affe~ting the 	likelihood 	of 	anticompetitive 	behavior 	that
are 	considered 	by 	the 	Federal 	Trade 	Commission 	and 	the 	Antitrust
Division 	of 	the 	Department 	of 	Justice 	in 	enforcing 	the 	federal
antitrust 	laws.
Overall, 	the 	NAAG 	Guidelines 	appear 	to 	give 	insufficient
recognition 	to 	the 	beneficial 	effects 	of 	many mergers. 	Mergers
play 	an 	important 	and 	positive 	role 	in 	a 	free 	enterprise 	economy
by 	constraining 	inefficient management, 	facilitating 	the
efficient 	flow 	of 	investment 	capital 	and 	permitting 	existing
productive 	assets 	to 	be 	used 	for 	their 	most 	valuable 	purpose.
Many 	mergers 	and 	acquisitions 	do 	not 	raise 	any 	antitrust
concerns.

Lloyd 	Constantine, 	Esquire
Market 	Definition
-2-
I 	agree 	with 	the 	NAAG Guidelines 	that 	careful 	market
definition 	is 	essential 	to 	effective merger 	enforcement. 	If
markets 	are 	defined 	too 	narrowly, 	the 	market 	power 	of 	the 	merged
firm 	is 	likely 	to 	be 	overstated, 	and 	mergers 	that 	are 	without
anticompetitive 	effects 	may 	be 	subjected 	to 	antitrust 	scrutiny.
The 	use 	of 	inappropriately 	narrow market 	definitions 	may 	also
result 	in 	understated 	market 	shares 	or 	suggest 	that 	merging 	firms
operate 	in 	distinct markets, 	allowing 	anticompetitive mergers 	to
escape 	antitrust 	challenge. 	.The 	principles 	that 	the 	NAAG
Guidelines 	propose 	to 	apply 	to 	product market 	definition 	appear
likelY 	to 	contribute 	to 	the 	delineation of 	inappropriately 	narrow
markets, 	although 	they may 	at 	times 	lead 	to 	acceptance 	of 	markets
that 	are 	inappropriately 	broad. 	There 	are 	three 	features 	of 	the
NAAG 	G~idelines 	that 	contribute 	to 	this 	result.
First, 	the 	NAAG 	Guidelines 	propose 	to 	include 	in 	an 	antitrust
market 	only 	those 	substitutes 	for 	a 	product 	that 	are 	comparably
priced. 	If 	this 	~riterion of 	comparably 	priced 	products 	is
strictly 	applied, 	it 	is 	likely 	to 	contribute 	to 	mistaken market
definitions. 	Most 	products 	have 	several 	features 	and 	the 	value
of 	a 	product 	to 	consumers 	depends 	on 	the 	value 	consumers 	place 	on
the 	various 	characteristics 	of 	the 	product. 	Products 	are
substitutes 	not 	solely 	because 	they 	have 	similar 	prices 	but
because 	the 	products 	provide 	common 	characteristics 	or 	fill
common 	needs 	at 	comparable 	cost. 	A barrel 	of 	residual 	fuel 	oil
has 	a 	quite 	different 	price 	from 	a 	thousand 	cubic 	feet 	of 	natural
gas. 	An 	electric 	utility may 	nevertheless 	find 	them 	to 	be 	close
substitutes 	if 	the 	utility 	takes 	into 	account 	differences 	in Btu
cont~nt, differences 	in maintenance 	costs 	and 	differences 	in
pol~ution control 	expenditures. 	Similarly, 	a 	particular
Chevrolet may 	have 	a 	significantly 	different 	price 	from 	a
particular 	Toyota, 	yet 	customers 	may 	find 	these 	automobiles 	to 	be
close 	substitutes 	after 	taking 	into 	account 	differences 	in
maintenance 	costs, 	fuel 	consumption, 	expected 	lifetime, 	comfort
and 	resale 	value.
Second, 	the NAAG Guidelines 	propose 	to 	include 	in 	an
antitrust 	product 	market 	only 	those 	products 	that 	are 	suitable
substitutes 	for 	75% 	of 	the 	customers 	of 	the 	merging 	firms. 	Given
the 	way 	this 	principle 	is 	stated, 	the 	75% 	figure 	appears 	to 	be
much 	too 	high. 	Suppose, 	for 	example, 	that 	two 	merging 	firms
would 	lose 	70% 	of 	their 	customers 	if 	they 	raised 	their 	price 	even
1% 	after 	the 	merger. 	The 	principle 	embodied 	in 	the NAAG
Guidelines 	would 	apparently 	lead 	to 	the 	conclusion 	that 	these
firms 	not 	only 	possess 	market 	power 	but 	that 	the 	merged 	firm
would 	be 	a 	monopolist, 	because 	only 	70% 	of 	consumers 	consider

Lloyd 	Constantine, 	Esquire 	-3-
other 	products 	to 	be 	close 	substitutes. 1/ 	Merging 	firms 	could
not 	find 	the 	exercise 	of 	market 	power 	profitable, 	however, 	if
small 	price 	increases 	would 	cost 	them 	70% 	of 	their 	customers 	and
sales.
Third, 	the 	proposed 	NAAG 	Guidelines 	apparently 	define
antitrust 	product markets 	based 	on 	the 	proportion 	of 	customers,
rather 	than 	on 	the 	proportion of 	sales, 	that 	would 	be 	lost 	in
response 	to 	a 	price 	increase. 	The 	degree 	to 	which 	substitution
possibilities 	constrain 	the 	exercise 	of 	market 	power, 	however,
depends 	on 	the 	volume 	of 	sales 	that would 	be 	lost 	as 	a
result 	of 	a 	price 	increase, 	not 	the 	number 	of 	customers. 	Suppose
for 	example, 	that 	35 	large 	customers 	accounted 	for 	99% 	of 	the
sales 	of 	a 	particular 	product 	but 	that 	50,000 	other 	customers
purchased 	the 	other 	1% 	of 	production. 	If 	these 	50,000 	small
customeTs 	could 	readily 	switch 	to 	a 	substitute 	product 	in
response 	to a 	price 	increase 	but 	there 	were 	no 	close 	substitute
in 	the 	end 	use 	accounted 	for 	by 	the 	large 	customers, 	then
focusing 	on 	the 	number 	of 	customers 	rather 	than 	the 	volume 	of
sales 	could 	lead 	tp 	delineation of 	inappropriately 	broad 	product
markets. 	conversely, 	even 	if 	only 	a 	small 	percentage 	of
customers 	switch 	to 	substitute 	products 	in 	response 	to 	a 	price
increase, 	the 	price 	increase 	will 	be 	unprofitable, 	if 	these
customers 	are 	large 	enough.
Given 	these 	features 	of 	the 	draft NAAG Guidelines, 	I 	believe
that 	the 	tests 	described 	in 	the 	Commission's 	1982 	Statement
Concerning 	Horizontal Mergers 	and 	the 	Department 	of 	Justice's
Mer~er Guidelines 	are more 	likely 	to 	yield 	accurate 	delineation
of 	product 	markets 	than 	the 	criteria 	outlined 	in 	the 	NAAG
Guidelines.
1/ 	A perhaps 	unintended 	result 	of 	the 	way 	this 	principle 	is
stated 	is 	that 	a merged 	firm 	could 	be 	found 	to 	be 	a 	monopolist
even 	though 	it 	would 	lose 	all 	of 	its 	sales 	if 	it 	raised 	its
price. 	This 	possibility 	arises 	because 	the 	NAAG 	Guidelines
appear 	to 	apply 	the 	substitution 	test 	to 	each 	individual
substitute 	product 	rather 	than 	to 	all 	substitutes 	collectively.
Thus, 	if 	50% 	of 	the 	customers 	of 	the 	merging 	firms 	considered 	one
product 	to 	be 	a 	perfect 	substitute 	for 	the 	product 	sold 	by 	the
merging 	firms 	while 	the 	other 	50% 	of 	the 	customers 	of 	the 	merging
firms 	considered 	a 	different 	product 	to 	be 	a 	perfect 	substitute,
neither 	of 	these 	products 	would 	be 	considered 	a 	substitute 	under
the 	draft 	NAAG 	Guidelines. 	Nevertheless, 	the 	merging 	firms 	would
lose 	all 	their 	sales 	if 	they 	chose 	to 	raise 	price.

Lloyd 	Constantine, 	Esquire 	-4-
The 	approach 	to 	geographic market 	definition 	embodied 	in 	the
draft NAAG 	Guidelines 	is 	only 	somewhat 	less 	troubling. 	The
proposal 	that 	geographic markets 	be 	defined 	to 	include 	the
suppliers 	of 	75% 	of 	the 	product 	consumed 	by 	customers 	of 	the
merging 	firms 	is 	very 	similar 	to 	the 	Elzinga-Hogarty 	test. 1/
This 	is 	one 	of 	the 	criteria 	that 	the 	FTC 	and 	the 	Department 	of
Justice 	use 	in 	evaluating 	geographic markets. 	As 	pointed 	out 	in
the 	Commission's 	1982 	Statement Concerning Horizontal Mergers,
however, 	the 	-absence 	of 	shipments ••• does 	not 	necessarily
indicate 	separate 	geographic markets, 	because, 	in 	some
circumstances, 	a 	slight 	price 	rise 	in one 	area 	could 	precipitate
shipments 	from 	other 	areas. R 11 	Conversely, 	substantial 	inter-
market 	shipments 	may 	coexist 	with 	import 	restrictions, 	such 	as
quotas, 	that 	preclude 	any 	increase 	in 	inter-market 	shipments 	in
response 	to 	a 	price 	increase. 	For 	these 	reasons, 	market
definition 	criteria 	based 	only 	on existing 	shipment 	patterns 	do
not 	necessarily 	lead 	to 	the 	correct 	conclusion 	and 	therefore
should 	be 	used 	in 	conjunction with-the 	other 	criteria 	outlined 	in
the 	FTC Statement 	Concerning Horizontal 	Mergers 	and 	the
Department 	of 	Justice Merger 	Guidelines.
,
Elimination 	of 	the 	RSafe Harbor R
~he 	draft NAAG Guidelines 	use 	the 	Herfindahl-Hirschman-Index
(HHI) 	to measure 	concentration and 	adopt 	essentially 	the 	same
thresholds 	for 	challenging mergers 	that 	are 	embodied 	in 	the
Department 	of 	Justice Merger 	Guidelines. 	The Department 	of
Justice 	Merger 	Guidelines, 	however, 	state 	that 	R[t]he 	Department
will 	not 	challenge mergers 	falling 	in 	this 	region 	[below 	1000]
except 	in extraordinary 	circumstances,R iI 	and 	that 	mergers
increasing 	the 	RBI 	by 	less 	than 	the 	threshold 	amounts 	are
unlikely 	to 	be 	challenged. 	The 	NAAG Guidelines 	do 	not 	contain 	a
similar 	safe 	harbor, 	noting 	only 	that mergers 	above 	the 	thres-
11 	See 	Elzinga 	and 	Hogarty, 	The 	Problem 	of 	Geographic Market
Delineation 	in Anti-Merger 	Suits, 	The 	Antitrust 	Bulletin, 	49
(1973) •
11 	Statement 	of 	Federal 	Trade 	Commission Concerning Horizontal
Mergers, 	2 CCH 	Trade 	Regulation Reporter, 	'4516, 	at 	6901-7
(1982) .
iI 	Department 	of 	Justice, 	Merger 	Guidelines, 	2 CCH 	Trade
Regulation Reporter 	,4490 	at 	6879-13 	(1984).

Lloyd 	Constantine, 	Esquire 	-5-
holds 	are 	likely 	to 	be 	challenged. 	2/ 	The 	safe 	harbor 	provisions
of 	the 	Department 	of 	Justice 	guidelines 	serve 	a 	useful 	purpose 	in
assuring 	members 	of 	the 	business 	community 	that 	transactions 	of
such minimal 	competitive 	impact 	will 	not 	be 	challenged 	or
subjected 	to 	lengthy 	antitrust 	review.
Other 	Factors 	Affecting Merger 	Analysis
Like 	the 	NAAG, 	I 	believe 	that 	merger 	analysis 	should 	consider
factors 	in addition 	to 	concentration data 	in 	assessing whether 	a
merger 	will 	increase 	the 	likelihood 	that 	firms 	will 	be 	able 	to
increase 	prices 	to 	consumers. 	Entry 	conditions 	are 	a
particularly 	important 	factor, 	as 	the 	proposed 	NAAG 	Guidelines
recognize. 	The 	NAAG Guidelines, 	however, 	say 	that 	entry 	within
one 	year 	must 	be 	possible, 	rather 	than 	the 	two-year 	period
suggested 	in 	the 	Department 	of 	Justice 	Merger 	Guidelines, 	on 	the
ground -that 	-during 	a 	year 	consumers 	will 	suffer 	significant 	harm
of 	the 	precise 	nature 	which 	the 	law 	was 	primarily 	enacted 	to
prevent.- 	This 	view 	appears 	to misapprehend 	the 	effect 	of 	the
threat 	of 	entry. 	A key 	question 	regarding 	entry 	is 	whether
entry, 	or 	the 	threat 	of 	entry, 	will 	make 	it 	unprofitable 	for
firms 	in 	a 	market 	to 	exercise 	their 	market 	power. 	If 	entry 	can
be 	sufficiently 	rapid, 	and 	the 	competitive 	effects 	of 	entry would
be 	sufficiently 	long 	lasting, 	the 	threat 	of 	entry 	serves 	to 	deter
price 	increases, 	even 	in 	the 	short 	run. 	Use 	of 	a 	longer 	time
period 	for 	evaluating 	the 	likelihood 	of 	entry 	than 	for
delineating 	the 	relevant 	product market 	reflects 	that 	-[w]here
new 	entry 	involves 	the 	dedication of 	long-lived 	assets 	to 	a
mar,ket, 	the 	resulting 	capacity 	and 	its 	adverse 	effects 	on
profitability will 	be 	present 	in 	the 	market 	until 	those 	assets
are 	economically depreciated.-!! 	The 	threat 	of 	this 	long-run
change 	in 	industry 	structure 	can 	be 	a more 	powerful 	deterrent 	to
pride 	increases 	than 	is 	short-run substitution. 	For 	this 	reason,
21 	The 	draft NAAG 	Guidelines 	also 	differ 	from 	the 	Department 	of
Justice 	Merger 	Guidelines 	in 	that 	the 	thresholds 	for 	increases 	in
concentration 	are 	halved 	for 	mergers 	in 	industries 	in which 	the
BBI 	has 	risen 	by 	100 	points 	in 	the 	preceding 	three 	years 	(50
points 	if 	the 	HRI 	is 	over 	1800). 	I 	believe 	it 	is 	preferable 	to
take 	account 	of 	trends 	in 	concentration 	and 	other 	changes 	in
market 	conditions 	as 	factors 	affecting 	the 	significance of 	market
shares 	and 	concentration, 	rather 	than 	to 	introduce 	additional
concentration 	thresholds.
~ 	Department 	of 	Justice, 	Merger 	Guidelines, 	2 CCH 	Trade
Regulation Reporter 	,4493 	at 	6879-15 	n.22 	(1984).

Lloyd 	Constantine, 	Esquire 	-6-
it 	seems 	appropriate 	that 	antitrust 	agencies 	take 	account 	of 	the
likelihood 	of 	entry over 	a 	somewhat 	longer 	period 	than 	is 	used
for 	the 	purpose 	of 	product 	market 	definition.
Although 	the 	draft 	NAAG 	Guidelines mention 	a 	number 	of 	other
factors 	affecting 	the 	likelihood 	of 	successful 	collusion 	that 	are
to 	be 	taken 	into 	account 	in one 	context 	or 	another, 	the 	NAAG
Guidelines 	omit 	other 	important 	factors 	identified 	in 	the 	FTC
Statement 	or 	the 	Department 	of 	Justice Merger 	Guidelines.
Depending 	on 	the 	other 	circumstances 	surrounding 	the 	merger,
factors 	such 	as 	product 	homogeneity, 	the 	availability 	of
transaction or 	firm 	specific 	price 	and 	sales 	data, 	buyer
characteristics, 	the 	rate 	of 	technological 	change, 	the 	exchange
of 	price 	or 	output 	information, 	or 	the 	existence 	of 	mandatory
delivered 	pricing 	can 	have 	an 	important 	effect 	on 	the 	likelihood
of 	successful 	collusion 	and, 	if 	relevant, 	should 	be 	taken 	into
account 	by 	antitrust 	agencies.
Efficiencies
The 	proposed 	NAAG Guidelines 	provide 	that 	efficiencies 	will
be 	considered 	only 	in 	cases 	where 	the 	post-merger 	HHI 	is 	1800
point~ or 	lower 	and 	that 	in such 	situations 	efficiencies 	of 	five
percent 	or 	more 	will make 	a 	challenge 	to 	a 	merger 	·unlike1y."
This 	setting 	of 	numerical 	standards 	for 	an 	efficiency 	·safe
harbor" 	differs 	from 	the 	Department 	of 	Justice Merger 	Guidelines
and 	the 	1982 	FTC Horizontal 	Merger 	Statement.
, I 	agree 	that 	evaluation of 	efficiency 	evidence 	in 	specific
cases 	is 	important. 	The 	Justice 	Department 	guidelines 	provide
for 	consideration of 	efficiencies, 	as 	one 	factor 	in exercising
enfo~cement discretion, 	only 	if 	merger-specific 	efficiencies 	are
proven 	by 	"clear 	and 	convincing· 	evidence. 	The 	1982 FTC
Statement 	provides 	for 	consideration of 	efficiencies 	as 	a 	·po1icy
matter" 	only 	if 	the 	claims 	are 	supported 	by 	·substantial
evidence.· 	The NAAG Guidelines 	likewise 	recognize 	the 	importance
of 	obtaining 	evidence, 	rather 	than 	relying 	on speculation 	and
argumentation.
Adopting 	a 	rule 	that 	efficiencies 	of 	greater 	than 	five
percent 	create 	a 	·safe 	harbor" 	in 	cases 	where 	the 	BBI 	is 	1800 or
lower, 	but 	that 	efficiencies, 	no 	matter 	how 	large, 	will 	be
disregarded 	in 	cases 	where 	the 	HHI 	is 	over 	1800 	points 	may 	be
unnecessarily 	rigid. 	Some 	mergers 	in markets 	with 	a 	BBI 	below
1800 may 	be 	dangerously 	anticompetitive 	even 	though 	a 	five
percent 	efficiency 	gain 	could 	be 	demonstrated. 	Also, 	it may 	not
be 	prudent 	completely 	to 	foreclose 	consideration 	of 	efficiencies,
even 	those 	of 	great 	magnitude 	that 	could 	be 	established 	by

Lloyd 	Constantine, 	Esquire 	-7-
convincing 	evidence, 	in 	a 	transaction 	that 	would 	produce 	a 	post-
merger 	HBl 	of 	slightly over 	1800. 	I 	question whether 	antitrust
enforcers 	have 	enough 	experience 	with 	efficiency 	issues 	to
promulgate 	such 	firm 	rules.
Conclusion
Two 	stated 	purposes 	of 	the 	draft NAAG Guidelines 	are 	to
provide 	a 	"uniform 	framework 	for 	the 	states" 	to 	analyze 	mergers
and 	to 	provide 	guidance 	to 	the 	business 	community 	concerning
enforcement 	standards. 	If 	differences 	in state 	laws 	and 	policies
are 	now 	creating 	confusion, 	uniform 	guidelines 	for 	state
antitrust 	law 	enforcement 	could 	promote 	the 	goals 	of 	consistency
and 	certainty. 	The NAAG Guidelines, 	however, 	take 	an 	approach
different 	from 	the 	Commission's 	merger 	policy 	and 	that 	of 	the
Department 	of 	Justice. 	For 	this.reason, 	the 	NAAG 	Guidelines 	also
have 	t~e potential 	to 	create 	confusion where 	none 	has 	existed.
For 	the 	reasons 	outlined 	above, 	I 	believe 	that 	applying 	the
NAAG 	Guidelines 	would 	tend 	to 	overstate 	the 	likelihood 	that 	a
merger 	will 	have 	significant 	anticompetitive 	effects 	and 	could
lead 	to 	efforts 	to 	block mergers 	that 	are 	likely 	to 	lower, 	not
raise, 	consumer 	prices.
dnce 	again, 	I 	appreciate 	this 	opportunity 	to 	comment 	on 	the
proposed 	NAAG 	Guidelines.
Sincerely yours,