1982 Merger Guidelines

15 U.S.C.A. § 18 (1981). Mergers subject to section 7 are prohibited if their effect "may
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be substantially to lessen competition, or to tend to create a monopoly."
15 U.S.C.A. § 1 (1981). Mergers subject to section 1 are prohibited if they constitute a
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“contract, combination... or conspiracy in restraint of trade."
They replace a set of Guidelines issued by the Department in 1968, and are subject to
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further revision in light of subsequent judicial decisions or economic studies. Although changes in
enforcement policy may precede the issuance of amended Guidelines, the Department will attempt
to conform the Guidelines to such changes as soon as possible.
1982 MERGER GUIDELINES
I.PURPOSE AND UNDERLYING POLICY ASSUMPTIONS
These Guidelines state in outline form the present enforcement policy of the U.S. Department
of Justice (“Department") concerning acquisitions and mergers (“mergers”) subject to section 7 of
the Clayton Act or to section 1 of the Sherman Act. They describe the general principles and
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specific standards normally used by the Department an analyzing mergers. By stating its policy as
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simply and clearly as possible, the Department hopes to reduce the uncertainty associated with
enforcement of the antitrust laws in this area.
Although the Guidelines should improve the predictability of the Departments merger
enforcement policy, it is not possible to remove the exercise of judgment from the evaluation of
mergers under the antitrust laws. Difficult factual questions arise under the standards stated below,
and the Department necessarily will base its decision on the data that are practicably available in each
case. Moreover, the standards represent generalizations to which some exceptions are inevitable. In
appropriate cases, the Department will challenge mergers that are competitively objectionable under
the general principles of the Guidelines regardless of whether they are covered by the specific
standards. Finally, the Guidelines are designed primarily to indicate when the Department is likely
to challenge mergers, not how it will conduct the litigation of cases that it decides to bring. Although

Parties seeking more specific advance guidance concerning the Department's enforcement
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intentions with respect to any particular merger should consider using the Business Review
Procedure. 28 C.F.R. § 50.6.
"Market power" also encompasses the ability of a single buyer or group of buyers to
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depress the price paid for a product to a level that is below the competitive price. Market power
by buyers has wealth transfer and resource misallocation effects analogous to those associated
with market power by sellers.
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relevant in the latter context, the factors contemplated in the standards do not exhaust the range of
evidence that the Department may introduce in court.
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The unifying theme of the Guidelines is that mergers should not be permitted to create or
enhance "market power" or to facilitate its exercise. A sole seller (a "monopolist") of a product with
no good substitutes can maintain a selling price that is above the level that would prevail if the market
were competitive. Where only a few firms account for most of the sales of a product, those firms can
in some circumstances coordinate, explicitly or implicitly, their actions in order to approximate the
performance of a monopolist. This ability of one or more firms profitably to maintain prices above
competitive levels for a significant period of time is termed "market power." Sellers with market
power also may eliminate rivalry on variables other than price. In either case, the result is a transfer
of wealth from buyers to sellers and a misallocation of resources.
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Although they sometimes harm competition, mergers generally play an important role in a
free enterprise economy. They can penalize ineffective management and facilitate the efficient flow
of investment capital and the redeployment of existing productive assets. While challenging
competitively harmful mergers, the Department seeks to avoid unnecessary interference with that
larger universe of mergers that are either competitively beneficial or neutral. In attempting to mediate
between these dual concerns, however, the Guidelines reflect the congressional intent that merger
enforcement should interdict competitive problems in their incipiency.

In contrast to the comprehensive definition suggested in this paragraph of the text, the
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market definition used by the Department can be stated formally as follows: "a market consists of
a group of products and an associated geographic area such that (an the absence of new entry) a
hypothetical, unregulated firm that made all the sales of those products in that area could increase
its profits through a small but significant and non-transitory increase in price (above prevailing or
likely future levels)." The standards for market definition in the text below implement this
decision.
The analysis that follows will be repeated for each product of each merging firm.
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II.MARKET DEFINITION AND MEASUREMENT
Using the standards stated below, the Department will define and measure the market for
each product or service ("product") of each of the merging firms. A market is a group of products
and an associated geographic area with certain economic characteristics that will be described in
subsequent paragraphs. In theory, all the demand and supply forces relevant to the evaluation of a
merger could incorporated in the definition of a market. Under the Guidelines, however, market
definition is not the exclusive analytical technique through which the Department considers those
forces. For example, because the potential new entry from the construction of new facilities and from
the substantial modification of existing facilities is not easily captured in conventional market
statistics, the Department takes such entry into account in interpreting market statistics. Taken as
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a whole, however, the standards in the Guidelines are designed to ensure that, whenever the
Department challenges a merger, the firms in the affected market could exercise market power if they
were able to coordinate their actions.
A.Product Market Definition
The first task in market definition is to determine what products to include in the market for
the product of the merging firm. In general, the Department seeks to identify a group of products
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In Sections III (A) and III (C), the Guidelines discuss factors affecting the ability of a
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group of sellers, by coordinating their actions, to approximate the performance of a single firm.
On occasion, the Department may base this analysis on likely future prices, provided that
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the relevant price relationships can be projected with confidence.
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such that a hypothetical firm that was the only present and future seller of those products could raise
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price profitably. That is, assuming that buyers could respond to an increase in price for a tentatively
identified product group only by shifting to other products, what would happen? If readily available
alternatives were, in the aggregate, sufficiently attractive to enough buyers, an attempt to raise price
would not prove profitable, and the "market" would prove to have been too narrowly defined.
Taking the product of the merging firm as a beginning point, the Department will establish
a provisional product market. The Department will include in the provisional market those products
that the merging firm's customers view as good substitutes at prevailing prices. The potential
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weakness of such a market based solely on existing patterns of supply and demand is that those
patterns might change substantially if the prices of the products included in the provisional market
were to increase. For this reason, the Department will test further and, if necessary, expand the
provisional market. The Department will add additional products to the market if a significant
percentage of the buyers of products already included would be likely to shift to those other products
in response to a small but significant and non-transitory increase in price. As a first approximation,
the Department will hypothesize a price increase of five percent and ask how many buyers would be

The purpose of hypothesizing a price increase is to interject a dynamic element in the
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analysis as a conceptual aid and in determining the outer limits of the market. Judged by the effect
on rate of return on invested capital, a given percentage price increase may be much more
significant in some industries than in others.
Direct evidence of the likely effect of a price increase often will not be available,
particularly in the context of the Department's prelitigation evaluation of a merger. As a result, the
Department often will have to rely on inferences from the types of circumstantial evidence
described in the text below. For consistency, the Department will assume that buyers and sellers
immediately recognize the price increase and believe that it will be sustained for the foreseeable
future.
The Department normally will not expand the market beyond the point at which this
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standard is satisfied unless it is convinced that independent competitive concerns exist in a larger
market.
In constructing and expanding the provisional market, the Department will not exclude
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any product that is at least as good a substitute as any product included. The Department will
refer to the products included in the market collectively as the “relevant product."
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likely to shift to the other products within one year. The Department will continue expanding the
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provisional market until it satisfies the general profitability standard stated above.
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In evaluating product substitutability, the Department will consider any relevant evidence,
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but will give particular weight to the following factors:
1) Evidence of buyers' perceptions that the products are or are not substitutes, particularly
if those buyers have shifted purchases between the products in response to changes in relative price
or other competitive variables;
2) Similarities or differences between the products in customary usage, design, physical
composition and other technical characteristics;
3) Similarities or differences in the price movements of the products over a period of years;
and
4)Evidence of sellers' perceptions that the products are or are not substitutes, particularly
if business decisions have been based on those perceptions.

Price discrimination requires that sellers be able to identify those buyers and that other
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buyers be unable profitably to purchase and resell to them.
Price discrimination is discussed in the Guidelines because it is sometimes a
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manifestation of market power created by a merger. In the context described in the text, a price
increase to one group of buyers, reducing quantities purchased by that group, will not be
accompanied by a price reduction and output increase to the other group. Hence, its effects on
consumer welfare are unambiguously negative. It is important to distinguish that situation from
the one in which a firm already possesses market power and is likely to exercise it, whether or not
it is able to practice price discrimination. In the latter situation, price discrimination often results
in an expansion of output, thus reducing the resource misallocation associated with market power.
The situations described in the text below are particularly subject to difficult questions of
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degree. In such cases, it is often useful to calculate market shares based on alternative reasonable
assumptions--for example, with and then without a particular type of facility arguably capable of
easy and economical production substitution. In its evaluation of such cases, the Department will
take into account the closeness of the issue, whichever way it is resolved for calculation of market
statistics.
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The analysis of product market definition to this point has assumed that price discrimination--
charging different buyers different prices for products having the same cost, for example--would not
be possible after the merger. Existing buyers sometimes will differ significantly in their assessment
of the adequacy of a particular substitute and the ease with which they could substitute it for the
product of the merging firm. Even though a general increase in price might cause such significant
substitution that it would not be profitable, sellers who can price discriminate could raise price only
to groups of buyers who cannot easily substitute away. If such price discrimination is possible, the
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Department will consider defining additional, narrower relevant product markets oriented to the buyer
groups subject to the exercise of market power.
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B.Identification of Firms that Produce the Relevant Product
In most cases, the Department's evaluation of a merger will focus primarily on firms that
currently produce and sell the relevant product. In addition to those firms, however, the Department
may include additional firms in the market in certain circumstances.
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Under other analytical approaches, production substitution sometimes has been reflected
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in the description of the product market. For example, the product market for stamped metal
products such as automobile hub caps might be described as "light metal stamping," a production
process rather than a product. The Department believes that the approach described in the text
provides a more clearly focused method of incorporating this factor in merger analysis. If
production substitution among a group of products is nearly universal among the firms selling one
or more of those products, however, the Department may use an aggregate description of those
markets as a matter of convenience.
The amount of sales or capacity to be included in the market is a separate question
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discussed in Section 11(D), below.
See note 10, above.
18
See Section 111(B), below.
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1. Production Substitution. The same productive and distributive facilities can sometimes be
used to produce and sell two or more products that buyers do not regard as good substitutes.
Production substitution refers to the shift by a firm in the use of facilities from producing and selling
one product to producing and selling another. Depending upon the cost and speed of that shift,
production substitution may allow firms that do not currently produce the relevant product to respond
effectively to an increase in the price of that product.
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If a firm has existing productive and distributive facilities that could easily and economically
be used to produce and sell the relevant product within six months in response to a small but
significant and non-transitory increase in price, the Department will include those facilities in the
market. As a first approximation, the Department will hypothesize a price increase of five percent
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and ask how many firms would be likely to change to the production and sale of the relevant product
within six months. Firms that must construct significant new productive or distributive facilities in
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order to produce and sell the relevant product will not be included in the market, although the
Department will consider their competitive significance in evaluating entry conditions generally.
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See note 17, above. In evaluating the competitive significance of internally consumed
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production, the Department will consider whether the vertically integrated firm, either through
sales of the relevant product or through sales of the products in which the relevant product is
embodied, could frustrate an effort by the sellers of the relevant product to exercise market
power.
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2.Durable Products. Some long-lived products may continue to exert competitive
influence after the time of original sale. If, under the standards stated in Section 11(A), recycled or
reconditioned products represent good substitutes for new products, the Department will include in
the market firms which recycle or recondition those products.
3.Internal Consumption. Captive production and consumption of the relevant product
by vertically integrated firms are part of the overall market supply and demand. Such firms are free
to buy or sell in the market, and they incur an opportunity cost for units they consume rather than
sell. The increase in that cost resulting from an increase in the market price may induce a change in
behavior. The Department will include in the market the facilities that are used to produce the
relevant product.
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C.Identification of Firms that Produce the Relevant Product at Relevant Locations
(Geographic Market Definition)
For each product market of each merging firm, the Department will determine the geographic
market(s) in which that firm sells. The purpose of geographic market definition is to establish a
geographic boundary that roughly separates firms that are important factors in the competitive
analysis of a merger from those that are not. Depending on the nature of the product, the geographic
market may be as small as a part of a city or as large as the entire world. Moreover, a single firm may
operate in a number of economically discrete geographic markets.
In general, the Department seeks to identify a geographic area such that a hypothetical firm
that was the only present or future producer of the relevant product in that area could profitably raise
price. That is, assuming that buyers could respond to a price increase within a tentatively identified

Because the definition of geographic markets in the guidelines is an area derived from
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the location of sellers facilities, the area may not always exhibit characteristics associated with
traditional geographic market definitions that are based, in whole or part, on buyer locations.
Nevertheless, as a rule of thumb, the merging firm should make a significant percentage of its
sales in the provisional market and firms located outside it collectively should account for a small
percentage of total sales there. It is possible that a geographic market could include only one firm.
See note 10, above. In some cases, a general expansion of the market boundaries may
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overstate the likely supply response. If a specific firm has a particular ability to sell in the
provisional market that is not shared by other firms in that firm's area, the Department will treat
that firm alone as being in the market.
See note 11, above.
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area only by shifting to firms located outside the area, what would happen? If firms located elsewhere
readily could provide the relevant product to the hypothetical firm's buyers in sufficient quantity at
a comparable price, an attempt to raise price would not prove profitable, and the "market" would
prove to have been too narrowly defined.
Taking the location of the merging firm (or each plant, for multi-plant firms) as a beginning
point, the Department will establish a provisional geographic market based upon the shipment
patterns firm and its closest competitors. The potential weakness of such a market boundary based
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on existing patterns of supply and demand is that those patterns might change substantially if the price
within the provisional market were to increase. For this reason, the Department will test further and,
if necessary, expand the provisional market. The Department will expand the provisional market
boundaries to include the locations of firms (or plants) that could make significant sales to customers
of firms previously included in the provisional market in response to a small but significant and non-
transitory increase in price. As a first approximation, the Department will hypothesize a price increase
of five percent and ask how many sellers could sell the product to such customers within one year.
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The Department will continue expanding the provisional market until it satisfies the general
profitability standard stated above.
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In constructing and expanding the provisional market, the Department will not exclude
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any area if production there is at least as good a substitute as production that is included.
See notes 13-14, above. Geographic price discrimination against a group of buyers is
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more likely when other buyers cannot easily purchase and resell the relevant product to them.
Such arbitrage is particularly difficult where the product is sold on a delivered basis and where
transportation costs are a significant percentage of the final coat.
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In evaluating geographic substitutability, the Department will consider any relevant
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evidence, but will give particular weight to the following factors:
1)Evidence of buyers actually having shifted their purchases among sellers at different
geographic locations, especially if the shifts corresponded to changes in relative price or other
competitive variables;
2) Similarities or differences in the price movements of the relative product in different
geographic areas over a period of years;
3) Transportation costs;
4) Costs of local distribution; and
5) Excess capacity by firms outside the provisional market.
The analysis of geographic market definition to this point has assumed that geographic price
discrimination--charging different prices net of transportation costs for the same product to buyers
in different locations, for example--would not be possible after the merger. As in the case of product
market definition, however, where price discrimination is possible, the Department will consider
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defining additional, narrower geographic markets oriented to those buyer groups subject to the
exercise of market power.
In general, the standards stated above will govern geographic market definition, whether
domestic or international. The Department, however, will be somewhat more cautious, both in
expanding market boundaries beyond the United States and in assessing the likely supply response
of specific foreign firms. Although firms located outside the United States may exert an important

Market shares can be expressed in terms of dollar sales, physical unit sales, physical
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capacity, or (in natural resource industries) physical reserves. The availability of data often will
determine the measurement base. Where a choice is possible, the Department will use the
measurement base that is the best indicator of the likely effect of the merger on market power.
See note 10, above. It follows that some firms included in the market might have little or
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no sales or capacity attributed to them. Conversely, the present sales or capacity of a firm may
understate its competitive significance. This effect is most likely in the acquisition of new or as-
yet-unexploited patent rights.
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competitive influence on domestic prices, they may be subject to additional constraints not present
in the purely domestic context. For example, changes in exchange rates, tariffs, and general political
conditions may limit the ability of such firms to respond to domestic price increases.
D.Calculating Market Shares
The Department normally will include in the market the total sales or capacity of all firms
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(or plants) that are identified as being in the market in Sections II(B) and II(C). In some cases,
however, total sales or capacity may overstate the competitive significance of a firm. With respect
to firms included in the market under Sections II(B)(l) (production substitution) and II(B)(3) (internal
consumption), for example, the Department will include only those sales likely to be made or capacity
likely to be used in the geographic market in response to a small but significant and non-transitory
increase in price. As a first approximation, the Department will hypothesize a price increase of five
percent and ask what the likely response of the firms would be within one year.
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Similarly, a firm's capacity may be so committed elsewhere that it would not be available to
respond to an increase in price in the market. In such cases, the Department also may include a
smaller part of the firm's sales or capacity.
III. HORIZONTAL MERGERS
Where the merging firms are in the same product and associated geographic market, the merger
is horizontal. In such cases, the Department will focus first on the post-merger concentration of the
market and the market shares of the merging firms. In some cases with low post-merger market

Markets can range from atomistic, where very large numbers of firms that are small
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relative to the overall size of the market compete with one another, to monopolistic, where one
firm controls the entire market. Far more common, and more difficult analytically, is the large
middle range of instances where a relatively small number of firms account for most of the sales in
the market.
For example, a market consisting of four firms with market shares of 30 percent, 30
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percent, 20 percent and 20 percent has an HHI of 2600 (30 x 30 x 20 x 20 = 2600). The
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HHI ranges from 10,000 (in the case of a pure monopoly) to a number approaching zero (in the
case of an atomistic market). Although it is desirable to include all firms in the calculation, lack of
information about small fringe firms is not critical because such firms do not affect the HHI
significantly.
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concentration and/or market shares, the Department will be able to determine without a detailed
examination of other factors that the merger poses no significant threat to competition. In other cases,
however, the Department will proceed to examine a variety of other factors relevant to that question.
A.Concentration and Market Share
Market concentration is a function of the number of firms in a market and their respective
market shares. Other things being equal, concentration affects the likelihood that one firm, or a
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small group of firms, could successfully exercise market power. The smaller the percentage of total
supply that a firm controls, the more severely it must restrict its own output in order to produce a
given price increase, and the less likely it is that an output restriction will be profitable. Where
collective action is necessary, an additional constraint applies. As the number of firms necessary to
control a given percentage of total supply increases, the difficulties and costs of reaching and
enforcing consensus with respect to the control of that supply also increase.
As an aid to the interpretation of market data, the Department will use the Herfindahl-
Hirschman Index ("HHI") of market concentration. The HHI is calculated by summing the squares
of the individual market shares of all the firms included in the market under the standards in Section
II. Unlike the traditional four-firm concentration ratio, the HHI reflects both the distribution of the
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market shares of the top four firms and the composition of the market outside the top four firms. It

The increase in concentration as measured by the HHI can be calculated independently of
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the overall market concentration by doubling the product of the market shares of the merging
firms. For example, the merger of firms with shares of 5 percent and 10 percent of the market
would increase the HHI by 100 (5 x 10 x 2 = 100). [The explanation for this technique is as
follows: in calculating the HHI before the merger, the market shares of the merging firms are
squared individually. Thus: (a)x (b). After the merger, the sum of those shares would be
2 2
squared. Thus: (a + b), which equals a + 2ab + b. The increase in the HHI therefore is
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represented by 2ab.]
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also gives proportionately greater weight to the market shares of the larger firms, which probably
accords with their relative importance in any collusive interaction.
The Department divides the spectrum of market concentration as measured by the HHI into
three regions that can be broadly characterized as unconcentrated (HHI below 1000), moderately
concentrated (HHI between 1000 and 1800) and highly concentrated (HHI above 1800). An
empirical study by the Department of the size dispersion of firms within markets indicates that the
critical HHI thresholds at 1000 and 1800 correspond roughly to four-firm concentration ratios of
50 percent and 70 percent, respectively. Although the resulting regions provide a useful format for
merger analysis, the numerical divisions suggest greater precision than is possible with the available
economic tools and information. Other things being equal, cases falling just above and just below
a threshold present comparable competitive concerns.
1.General Standards. In evaluating horizontal mergers, the Department will consider
both the post-merger market concentration and the increase in concentration resulting from the
merger. The link between concentration and market power is explained above. The increase in
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concentration is relevant to several key issues. Although mergers among small firms increase
concentration, they are less likely to have anticompetitive consequences. Moreover, even in
concentrated markets,it is desirable to allow firms some scope for merger activity in order to achieve

economies of scale and to permit exit from the market.
The general standards for horizontal mergers are as follows:

Mergers producing increases in concentration close to the 100 point threshold include
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those between firms with market shares of 25 percent and 2 percent, 16 percent and 3 percent,
12 percent and 4 percent, 10 percent and 5 percent, 8 percent and 6 percent, and 7 percent and 7
percent.
Mergers producing increases in concentration close to the 50 point threshold include
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those between firms with market shares of 12 percent and 2 percent, 8 percent and 3 percent, 6
percent and 4 percent, and 5 percent and 5 percent.
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a)Post-Merger HHI Below 1000. Markets in this region generally would be considered
to be unconcentrated, having the equivalent of at least 10 equally sized firms. Because implicit
coordination among firms is likely to be difficult and because the prohibitions of section 1 of the
Sherman Act are usually an adequate response to any explicit collusion that might occur, the
Department is unlikely to challenge mergers falling in this region.
b)Post-Merger HHI Between 1000 and 1800. Because this region extends from the
point at which the competitive concerns associated with concentration become significant to the
point at which they become quite serious, generalization is particularly difficult. The Department,
however, is unlikely to challenge mergers producing an increase in the HHI of less than 100 points.
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The Department is more likely than not to challenge mergers in this region that produce an increase
in the HHI of more than 100 points. In making that decision, however, the Department will take into
account the post-merger concentration of the market, the size of the resulting increase in
concentration, and the presence or absence of the other factors discussed in Sections III(B) and
III(C).
c)Post-Merger HHI Above 1800
. Markets in this region generally are considered
to be highly concentrated, having the equivalent of no more than approximately six equally sized
firms. Additional concentration resulting from mergers is a matter of significant competitive concern,
and the Department will resolve close questions in favor of challenging the merger. The Department
is unlikely, however, to challenge mergers producing an increase in the HHI of less than 50 points.
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For mergers producing an increase in the HHI of from 50 to 100 points, the Department will base

There is some economic evidence that, where one or two firms dominate a market, the
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creation of a strong third firm enhances competition. The Department has considered this
evidence but is not presently prepared to balance this possible gain against the certainty of
substantially increased concentration in the market.
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its decision whether to challenge the merger on the post-merger concentration of the market, the size
of the resulting increase in concentration, and the presence or absence of the factors discussed in
Sections III (8) and III (C). The Department is likely to challenge mergers in this region that produce
an increase in the HHI of 100 points or more.
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2.Leading Firm Proviso. In some cases, typically where one of the merging firms
is small, mergers that may create or enhance the market power of a single dominant firm could pass
scrutiny under the standards stated in Section III(A)(l). Notwithstanding those standards, the
Department is likely to challenge the merger of any firm with a market share of at least 1 percent
with the leading firm in the market, provided that the leading firm has a market share that is at least
35 percent and is approximately twice as large as that of the second largest firm in the market.
Because the ease and profitability of collusion are of little relevance to the ability of a single
dominant firm to exercise market power, the Department will not consider the factors discussed in
Section III(C) in this context. Under this standard, an ample market for small acquisitions typically
will remain, and it is unlikely that any relevant economies will be limited to mergers involving the
largest firm in the market.
B. Ease of Entry.
If entry into a market is so easy that existing competitors could not succeed in raising price
for any significant period of time, the Department is unlikely to challenge mergers in that market.
Under the standards in Section II(B)(l), firms that do not presently sell the relevant product, but that
could easily and economically sell it using existing facilities, are included in the market and are
assigned a market share. This section considers the additional competitive effects of (1) production

See note 10, above. In general, entry is more likely when the additional assets necessary
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to produce the relevant product are short-lived or widely used outside the particular market.
Conversely, entry is less likely when those assets are long-lived and highly specialized to the
particular application. Entry is generally facilitated by the growth of the market and hindered by
its stagnation or decline. Entry also is hindered by the need for scarce special skills or resources
and the need to achieve a substantial market share in order to realize important economies of
scale. See also Section IV(B)(l)(b), below.
Although this type of supply response will take longer to materialize than those
35
previously considered, its prospect may have a greater deterrent effect on the exercise of market
power by present sellers. Where new entry involves the dedication of long-lived assets to a
market, the resulting capacity and its adverse effects on profitability will be present in the market
until those assets are depreciated.
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substitution where the necessary modifications are more substantial, and (2) entry through the
construction of new facilities.
In assessing ease of entry to a market, the Department will consider the likelihood and probable
magnitude of entry in response to a small but significant and non-transitory increase in price. As a
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first approximation, the Department will hypothesize a price increase of five percent and ask, how
much new entry would be likely to occur within two years. In most cases in which significant entry
35
is unlikely, the Department will not attempt to differentiate further the degrees of difficulty of entry.
In cases where entry is unusually difficult, however, the Department is more likely to challenge a
merger.
C.Other Factors
A variety of factors other than concentration, market shares, and ease of entry affect the
likelihood that a merger will create, enhance or facilitate the exercise of market power. In evaluating
mergers, the Department will consider the following factors as they relate to the ease and profitability
of collusion. Where relevant, the factors are most likely to be important where the Department's
decision whether to challenge a merger is otherwise close.

A similar situation may exist where there is rapid technological change or where supply
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arrangements consist of many complicated terms in addition to price.
This conclusion would not apply, however, where-the significance of heterogeneity is
37
substantially reduced through detailed specifications that are provided by the buyer and that form
the basis for all firms' bids.
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1.Nature of the Product and Terms of Sale.
(a)Homogeneity-Heterogeneity of the Relevant Product Generally. In a market
with a homogeneous and undifferentiated product, a cartel need establish only a single price--a
circumstance that facilitates reaching consensus and detecting deviation. As the products which
constitute the relevant product become more numerous, heterogeneous, or differentiated, however,
the problems facing a cartel become more complex. Instead of a single price, it may be necessary to
establish and enforce a complex schedule of prices corresponding to gradations in actual or perceived
quality attributes among the competing products.
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Product variation is arguably relevant in all cases, but practical considerations dictate a more
limited use of the factor. There is neither an objective index of product variation nor an empirical
basis for its use in drawing fine distinctions among cases. As a result, this factor will be taken into
account only in relatively extreme cases where both identification and effect are more certain. For
example, when the relevant product is completely homogeneous and undifferentiated, the Department
is more likely to challenge the merger. Conversely, when the relevant product is very heterogeneous
or sold subject to complex configuration options or customized production, the Department is less
likely to challenge the merger. Over a significant middle range of the spectrum of product variation,
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this factor is less likely to affect the Department's analysis.
b)Degree of Difference Between the Products and Locations in the Market and the
Next-Best-Substitutes. The market definition standards stated in Section II require drawing relatively
bright lines in order to determine the products and sellers to be considered in evaluating a merger.
For example, in defining the relevant product, all "good substitutes" in demand are included. The

18
profitability of any collusion that might occur will depend in part, however, on the quality of the next-
best substitute. That is, it matters whether the next-best substitute is only slightly or significantly
inferior to the last product included in the relevant product. Similarly, it matters whether the next-
most-distant seller is only slightly or significantly farther away than the last seller included in the
geographic market. The larger the "gap" at the edge of the product and geographic markets, the more
likely the Department is to challenge the merger.
c) Similarities and Differences in the Products and Locations of the Merging Firms. There
also may be relevant comparisons among the products or sellers included in the market. Where
products in a relevant market are differentiated or sellers are spatially dispersed, individual sellers
usually compete more directly with some rivals than with others. In markets with highly differentiated
products, the Department will consider the extent to which consumers perceive the products of the
merging firms to be relatively better or worse substitutes for one another than for other products in
the market. In markets with spatially dispersed sellers and significant transportation costs, the
Department will consider the relative proximity of the merging firms. If the products or plants of the
merging firms are particularly good substitutes for one another, the Department is more likely to
challenge the merger.
2. Information About Specific Transactions and Buyer Market Characteristics. Collusive
agreements are more likely to persist if participating firms can quickly detect and retaliate against
deviations from the agreed prices or other conditions. Such deviations are easiest to detect, and
therefore least likely to occur, in markets where detailed information about specific transactions or
individual price or output levels is readily available to competitors. The Department is more likely to
challenge a merger if such detailed information is available to competitors, whether the information
comes from an exchange among sellers, public disclosure by buyers, reporting by the press or a
government agency, or some other source.

19
Certain buyer market characteristics also may facilitate detection of deviation from collusive
agreements. If orders for the relevant product are frequent, regular and small relative to the total
output of a typical firm in the market, collusion is more likely to succeed because the benefits of
departing from the collusive agreement in any single transaction are likely to be small relative to the
potential costs. In order to increase its sales significantly in such circumstances, a seller would have
to depart from the collusive agreement on a large number of orders. Each such sale takes customers
away from other parties to the agreement, a fact that is particularly evident when demand is stable
or declining. As a result, the chances of detection and effective response by other sellers increase with
the number of such sales. The Department is more likely to challenge a merger where such buyer
market characteristics exist.
3. Conduct of Firms in the Market. The Department is more likely to challenge a merger in
the following circumstances:
a) Firms in the market previously have been found to have engaged in horizontal collusion
regarding price, territories, or customers, and the characteristics of the market have not changed
appreciably since the most recent finding. The additional concentration resulting from the merger
could make explicit collusion more difficult to detect or tacit collusion more feasible.
b) One or more of the following types of practices are adopted by substantially all of the
firms in the market: i) mandatory delivered pricing; ii) exchange of price or output information in
a form that could assist firms in setting or enforcing an agreed price; iii) collective standardization of
product variables on which the firms could compete; and iv) price protection clauses. Although not
objectionable under all circumstances, these types of practices tend to make collusion easier, and their
widespread adoption by the firms in the market raises some concern that collusion may already exist.
c) The firm to be acquired has been an unusually disruptive and competitive influence in the
market. Before invoking this factor, the Department will determine whether the market is one in
which performance might plausibly deteriorate because of the elimination of one disruptive firm.

The exercise of market power often results in a gradual loss of market share. Fringe
38
firms find it possible and profitable to expand their sales, and new entry may occur.
20
4. Market Performance. When the market in which the proposed merger would occur is
currently performing non-competitively, the Department is more likely to challenge the merger. Non-
competitive performance suggests that the firms in the market already have succeeded in overcoming,
at least to some extent, the obstacles to effective collusion. Additional concentration of such a market
through merger could further facilitate the collusion that already exists. When the market in which
the proposed merger would occur is currently performing competitively, however, the Department
will apply its ordinary standards of review. The fact that the market is currently competitive casts little
light on the likely effect of the merger.
In evaluating the performance of a market, the Department will consider any relevant
evidence, but will give particular weight to the following evidence of possible non-competitive
performance when the factors are found in conjunction:
a)Stable relative market shares of the leading firms in recent years;
b)Declining combined market share of the leading
firms in recent years; and
38
c) Profitability of the leading firms over substantial periods of time that significantly
exceeds that of firms in industries comparable in capital intensity and risk.
IV. HORIZONTAL EFFECT FROM NON-HORIZONTAL MERGERS
By definition, non-horizontal mergers involve firms that do not operate in the same market.
It necessarily follows that such mergers produce no immediate change in the level of concentration
in any relevant market as defined in Section II. Although non-horizontal mergers are less likely than
horizontal mergers to create competitive problems, they are not invariably innocuous. This Section
describes the principal theories under which the Department is likely to challenge non-horizontal
mergers.

Under traditional usage, such a merger could be characterized as either "vertical" or
39
"conglomerate," but the label adds nothing to the analysis.
The terms "acquired" and "acquiring" refer to the relationship of the firms to the market
40
of interest, not to the way the particular transaction is formally structured.
21
A.Elimination of Specific Potential Entrants
1.The Theory of Potential Competition. In some circumstances, the non-horizontal
merger of a firm already in a market (the "acquired firm") with a potential entrant to that market
39
(the "acquiring firm") may adversely affect competition in the market. If the merger effectively
40
removes the acquiring firm from the edge of the market it could have either of the following effects:
a)Harm to "Perceived Potential Competition". By eliminating a significant present
competitive threat that constrains the behavior of the firms already in the market, the merger could
result in an immediate deterioration in market performance. The economic theory of limit pricing
suggests that monopolists and groups of colluding firms may find it profitable to restrain their pricing
in order to deter new entry that is likely to push prices even lower by adding capacity to the market.
If the acquiring firm had unique advantages in entering the market, the firms in the market might be
able to set a new and higher price after the threat of entry by the acquiring firm was eliminated by
the merger.
b)Harm to "Actual Potential Competition". By eliminating the possibility of entry by the
acquiring firm in a more pro-competitive manner, the merger could result in a lost opportunity for
improvement in market performance resulting from the addition of a significant competitor. The
more pro-competitive alternatives include both new entry and entry through a "toehold" acquisition
of a present small competitor.
2.Relation Between Perceived and Actual Potential Competition. If it were always
profit-maximizing for incumbent firms to set price in such a way that all entry was deterred and if
information and coordination were sufficient to implement this strategy, harm to perceived potential
competition would be the only competitive problem to address. In practice, however, actual

When collusion is only tacit, the problem of arriving at and enforcing the correct limit
41
price is likely to be particularly difficult.
22
potential competition has independent importance. Firms already in the market may not find it
optimal to set price low enough to deter all entry; moreover, those firms may misjudge the entry
advantages of a particular firm and, therefore, the price necessary to deter its entry.
41
3.Enforcement Standards. Because of the close relationship between perceived potential
competition and actual potential competition, the Department will evaluate mergers that raise either
type of potential competition concern under a single structural analysis analogous to that applied to
horizontal mergers. The Department first will consider a set of objective factors designed to identify
cases in which harmful effects are plausible. In such cases, the Department then will conduct a more
focused inquiry to determine whether the likelihood and magnitude of the possible harm justify a
challenge to the merger. In this context, the Department will consider any specific evidence
presented by the merging parties to show that the inferences of competitive harm drawn from the
objective factors are unreliable.
The factors that the Department will consider are as follows:
a) Market Concentration. Barriers to entry are unlikely to affect market performance if the
structure of the market is otherwise not conducive to monopolization or collusion. Adverse
competitive effects are likely only if overall concentration, or the largest firm's market share, is high.
The Department is unlikely to challenge a potential competition merger unless overall concentration
of the acquired firm's market is above 1800 HHI (a somewhat lower concentration will suffice if one
or more of the factors discussed in Section III(C) indicate that effective collusion in the market is
particularly likely). Other things being equal, the Department is increasingly likely to challenge a
merger as this threshold is exceeded.
b) Conditions of Entry Generally. If entry to the market is generally easy, the fact that entry
is marginally easier for one or more firms is unlikely to affect the behavior of the firms in the market.

For example, the firm already may have moved beyond the stage of consideration and
42
have made significant investments demonstrating an actual decision to enter.
23
The Department is unlikely to challenge a potential competition merger when new entry into the
acquired firm's market can be accomplished by firms without any specific entry advantages under
the conditions stated Section III(B). Other things being equal, the Department is increasingly likely
to challenge a merger as the difficulty of entry increases above that threshold.
c) The Acquiring Firm’s Entry Advantage. If more than a few firms have the same or a
comparable advantage in entering the acquired firm's market, the elimination of one firm is unlikely
to have any adverse competitive effect. The other similarly situated firm(s) would continue to exert
a present restraining influence, or, if entry would be profitable, would recognize the opportunity and
enter. The Department is unlikely to challenge a potential competition merger if the entry advantage
ascribed to the acquiring firm (or another advantage of comparable importance) is also possessed
by three or more other firms. Other things being equal, the Department is increasingly likely to
challenge a merger as the number of other similarly situated firms decreases below three and as the
extent of the entry advantage over non-advantaged firms increases.
If the evidence of likely actual entry by the acquiring firm is particularly strong, however,
42
the Department may challenge a potential competition merger, notwithstanding the presence of three
or more firms that are objectively similarly situated. In such cases, the Department will determine
the likely scale of entry, using either the firm's own documents or the minimum efficient scale in the
industry. The Department will then evaluate the merger much as it would a horizontal merger
between a firm the size of the likely scale of entry and the acquired firm.
d) The Market Share of the Acquired Firm. Entry through the acquisition of a relatively
small firm in the market may have a competitive effect comparable to new entry. Small firms
frequently play peripheral roles in collusive interactions, and the particular advantages of the

Although a similar effect is possible with the acquisition of larger firms there is an
43
increased danger that the acquiring firm will choose to acquiesce in monopolization or collusion
because of the enhanced profits that would result from its own disappearance from the edge of the
market.
This competitive problem could result from either up stream or downstream integration,
44
and could affect competition an either the upstream market or the downstream market. In the
text, the term "primary market" refers to the market in which the competitive concerns are being
considered, and the term "secondary market" refers to the adjacent market.
24
acquiring firm may convert a fringe firm into a significant factor in the market. The Department
43
is unlikely to challenge a potential competition merger when the acquired firm has a market share
of five percent or less. Other things being equal, the Department is increasingly likely to challenge
a merger as the market share of the acquired firm increases above that threshold. The Department
is likely to challenge any merger satisfying the other conditions in which the acquired firm has a
market share of 20 percent or more.
B. Competitive Problems from Vertical Mergers
1. Barriers to Entry from Vertical Mergers
In certain circumstances, the vertical integration resulting from vertical mergers could create
competitively objectionable barriers to entry. Stated generally, three conditions are necessary (but
not sufficient) for this problem to exist. First, the degree of vertical integration between the two
markets must be so extensive that entrants to one market (the "primary market") also would have
to enter the other market (the "secondary market") simultaneously. Second, the requirement of
44
entry at the secondary level must make entry at the primary level significantly more difficult and less
likely to occur. Finally, the structure and other characteristics of the primary market must be
otherwise so conducive to non-competitive performance that the increased difficulty of entry is likely
to affect its performance. The following standards state the criteria by which the Department will
determine whether these conditions are satisfied.

Ownership integration does not necessarily mandate two-level entry by new entrants to
45
the primary market. Such entry is most likely to be necessary where the primary and secondary
markets are completely integrated by ownership and each firm in the primary market uses all of
the capacity of its associated firm in the secondary market. In many cases of ownership
integration, however, the functional fit between vertically integrated firms is not perfect, and an
outside market exists for the sales (purchases) of the firms in the secondary market. If that market
is sufficiently large and diverse, new entrants to the primary market may be able to participate
without simultaneous entry to the secondary market. In considering the adequacy of this
alternative, the Department will consider the likelihood of predatory price or supply “squeezes" by
the integrated firms against their unintegrated rivals.
Entry into the secondary market may be greatly facilitated in that an assured supplier
46
(customer) is provided by the primary market entry.
25
a. Need for Two-Level Entry. If there is sufficient unintegrated capacity in the secondary
45
market, new entrants to the primary market would not have to enter both markets simultaneously.
The Department is unlikely to challenge a merger on this ground where post-merger sales
(purchases) by unintegrated firms in the secondary market would be sufficient to service two
minimum-efficient-scale plants in the primary market. When the other conditions are satisfied, the
Department is increasingly likely to challenge a merger as the unintegrated capacity declines below
this level.
b. Increased Difficulty of Simultaneous Entry to Both Markets. The relevant question is
whether the need for simultaneous entry to the secondary market gives rise to a substantial
incremental difficulty as compared to entry into the primary market alone. If entry at the secondary
level is easy in absolute terms, the requirement of simultaneous entry to that market is unlikely
adversely to affect entry to the primary market. Whatever the difficulties of entry into the primary
market may be, the Department is unlikely to challenge a merger on this ground if new entry into
the secondary market can be accomplished under the conditions stated in Section III(B). When
46
entry is not possible under those conditions, the Department is increasingly concerned about vertical
mergers as the difficulty of entering the secondary market increases. The Department, however, will

It Is important to note, however, that this problem would not exist if a significant outside
47
market exists at the secondary level. In that case, entrants could enter with the appropriately
26
invoke this theory only where the need for secondary market entry significantly increases the costs
(which may take the form of risks) of primary market entry.
i) Increased Cost of Capital as a Barrier to Entry. More capital is necessary to enter two
markets than to enter one. Standing alone, however, this additional capital requirement does not
constitute a barrier to entry to the primary market. If the necessary funds were available at a cost
commensurate with the level of risk in the secondary market, there would be no adverse effect. In
some cases, however, lenders may doubt that would-be entrants to the primary market have the
necessary skills and knowledge to succeed in the secondary market and, therefore, in the primary
market. In order to compensate for this risk of failure, lenders might charge a higher rate for the
necessary capital. This problem becomes increasingly significant as a higher percentage of the capital
assets in the secondary market are long-lived and specialized to that market and, therefore, difficult
to recover in the event of failure. In evaluating the likelihood of increased barriers to entry resulting
from increased cost of capital, therefore, the Department will consider both the degree of similarity
in the essential skills in the primary and secondary markets and the degree of specialization of the
capital assets in the secondary market.
ii) Economies of Scale as a Barrier to Entry. Economies of scale in the secondary market
may constitute an additional barrier to entry to the primary market in some situations requiring two-
level entry. The problem could arise if the capacities of minimum-efficient-scale plants in the primary
and secondary markets differ significantly. For example, if the capacity of a minimum-efficient-scale
plant in the secondary market were significantly greater than the needs of a minimum-efficient-scale
plant in the primary market, entrants would have to choose between inefficient operation at the
secondary level (because of operating an efficient plant at an inefficient output or because of
operating an inefficiently small plant) or a larger than necessary scale at the primary level. Either of
these effects could cause a significant increase in the operating costs of the entering firm.
47

scaled plants at both levels, and sell or buy in market as necessary.
For example, a market with 100 firms of equal size would perform competitively despite
48
a significant increase in entry barriers.
Even if all the conditions above are satisfied, the Department may not challenge a
49
particular merger. The likelihood of significant competitive harm is lower than it is for horizontal
mergers identified as competitively objectionable under the standards in Section III, and the
extensive pattern of use integration, which is a necessary condition to the competitive problem
under discussion, may constitute evidence that substantial economies are afforded by vertical
integration. When such economies are present, it might be economically perverse and inequitable
to the remaining independent firms to deny them the ability to integrate through merger.
27
c. Structure and Performance of the Primary Market. Barriers to entry are unlikely to affect
performance if the structure of the primary market is otherwise not conducive to monopolization or
collusion. The Department is unlikely to challenge a merger on this around unless overall
48
concentration of the primary market is above 1800 HHI (a somewhat lower concentration will
suffice if one or more of the factors discussed in Section III(C) indicate that effective collusion is
particularly likely). Above that threshold, the Department is increasingly likely to challenge a merger
that meets the other criteria set forth above as the concentration increases.
49
2. Facilitating Collusion Through Vertical Mergers.
a. Vertical Integration to the Retail Level. A high level of vertical integration by upstream
firms into the associated retail market may facilitate collusion in the upstream market by making it
easier to monitor price. Retail prices are generally more visible than prices in upstream markets, and
vertical mergers may increase the level of vertical integration to the point at which the monitoring
effect becomes significant. Adverse competitive consequences are unlikely unless the upstream
market is generally conducive to collusion and a large percentage of the products produced there
are sold through vertically integrated retail outlets.
The Department is unlikely to challenge a merger, on this ground unless I) overall
concentration of the upstream market is above 1800 HHI (a somewhat lower concentration will
suffice if one or more of the factors discussed in Section III (C) above indicate that effective

See note 49, above.
50
28
collusion is particularly likely), and ii) a large percentage of the upstream product would be sold
through vertically-integrated retail outlets after the merger. Where the stated thresholds are met or
exceeded, the Department's decision whether to challenge a merger on this ground will depend upon
an individual evaluation of its likely competitive effect.
50
b. Elimination of a Disruptive Buyer. The elimination by vertical merger of a particularly
disruptive buyer in a downstream market may facilitate collusion in the upstream market. If upstream
firms view sales to a particular buyer as sufficiently important, they may deviate from the terms of
a collusive agreement in an effort to secure that business, thereby disrupting the operation of the
agreement. The merger of such a buyer with an upstream firm may eliminate that rivalry, making it
easier for the upstream firms to collude effectively. Adverse competitive consequences are unlikely
unless the upstream market is generally conducive to collusion and the disruptive firm is significantly
more attractive to sellers than the other firms in its market.
The Department is unlikely to challenge a merger on this ground unless i) overall
concentration of the upstream market is 1800 HHI or above (a somewhat lower concentration will
suffice if one or more of the factors discussed in III(C) above indicate that effective collusion is
particularly likely), and ii) the allegedly disruptive firm differs substantially in volume of purchases
or other relevant characteristics from the other firms in its market. Where the stated thresholds are
met or exceeded, the Department's decision whether to challenge a merger on this ground will
depend upon an individual evaluation of its likely competitive effect.
3.Evasion of Rate Regulation
Non-horizontal mergers may be used by monopoly public utilities subject to rate regulation
as a tool for circumventing that regulation. The clearest example is the acquisition by a regulated
utility of a supplier of its fixed or variable inputs. After the merger, the utility would be selling to itself
and might be able arbitrarily to inflate the prices of internal transactions. Regulators may have great

A less severe, but nevertheless serious, problem can arise when a regulated utility
51
acquires a firm that is not vertically related. The use of common facilities and managers may
create an insoluble cost allocation problem and provide the opportunity to charge utility
customers for non-utility costs, consequently distorting resource allocation in the adjacent as well
as the regulated market.
Where a regulatory agency has the responsibility for approving such mergers, the
52
Department will express its concerns to that agency in its role as competition advocate.
At a minimum, the Department will require clear and convincing evidence that the
53
merger will produce substantial cost savings resulting from the realization of scale economies,
integration of production facilities, or multi-plant operations which are already enjoyed by one or
more firms in the industry and that equivalent results could not be achieved within a comparable
period of time through internal expansion or through a merger that threatened less competitive
harm. In any event, the Department will consider such efficiencies only in resolving otherwise
close cases.
29
difficulty in policing these practices, particularly if there is no independent market for the product (or
service) purchased from the affiliate. As a result, inflated prices could be passed along to consumers
51
as "legitimate" costs. In extreme cases, the regulated firm may effectively preempt the adjacent
market, perhaps for the purpose of suppressing observable market transactions, and may distort
resource allocation in that adjacent market as well as in the regulated market. In such cases, however,
the Department recognizes that genuine economies of integration may be involved. The Department
will consider challenging mergers that create substantial opportunities for such abuses.
52
V.DEFENSES
A.Efficiencies
In the overwhelming majority of cases, the Guidelines will allow firms to achieve available
efficiencies through mergers without interference from the Department. Except in extraordinary cases,
the Department will not consider a claim of specific efficiencies as a mitigating factor for a merger
that would otherwise be challenged. Plausible efficiencies are far easier to allege than to prove.
53
Moreover, even if the existence of efficiencies were clear, their magnitudes would be extremely
difficult to determine.

Although its original basis is open to question, the defense is sometimes explained as a
54
balancing of competitive and non-competitive concerns. Under that view, when the elements of
the defense are satisfied, there is a conclusive presumption that the anticompetitive dangers
associated with the merger are outweighed by the income losses to creditors, stockholders, and
communities associated with the failure of the firm. As a general matter, the Department views the
incorporation of non-competitive concerns into antitrust analysis as inconsistent with the mandate
contained in the antitrust laws. To the extent that the financial health of the firm is relevant to the
competitive analysis, the Department, of course, will consider it in that context.
11 U.S.C.A. § § 1101 et
seq. (1979).
55
The fact that an offer is less than the proposed transaction does not make it
56
unreasonable.
The Department is unlikely to challenge an otherwise anticompetitive merger in which
57
one of the merging firms is a financially healthy subdivision of an allegedly failing parent firm
when: 1) the parent firm satisfies the above conditions, and 2) the competitive harm from the
disappearance of the parent firm from its market would substantially outweigh the competitive
harm threatened by the merger, 3) the proposed transaction probably would enable the parent firm
30
B. Failing Firm
The "failing firm defense” is a long-established, but ambiguous, doctrine under which an
54
anticompetitive merger may be allowed because one of the merging firms is “failing." Because the
defense can immunize significantly anticompetitive mergers, the Department will construe its elements
strictly.
The Department is unlikely to challenge an anticompetitive merger in which one of the
merging firms is allegedly failing when: 1) the allegedly failing firm probably would be unable to meet
its financial obligations in the near future and 2) it probably would not be able to reorganize
successfully under Chapter 11 of the Bankruptcy Act, and 3) it has made unsuccessful good faith
55
efforts to elicit reasonable alternative offers of acquisition of the failing firm that would both keep
56
it in the market and pose a less severe danger to competition than does the proposed merger.
Although these standards are far more difficult to apply when the allegedly failing firm is an
unincorporated part of a larger parent firm, the Department will recognize the defense in appropriate
cases of that type.
57

to avoid bankruptcy or to reorganize successfully, 4) the third condition stated in the text also has
been satisfied with respect to the healthy subdivision, and 5) the merging firm is not capable of
independent existence as a business entity. Where the merging firm is capable of independent
existence, the Division may insist that the parent company attempt to transfer common stock in it
to the parent company's creditors.
31