2006 Commentary on the Horizontal Merger Guidelines

Commentary on the
Horizontal Merger Guidelines
2006
Federal Trade Commission U.S. Department of Justice

Commentary on the
Horizontal
Merger
Guidelines
U.S. Department of Justice Federal Trade Commission
March 2006

Table of Contents
Foreword ........................................................................ v
Introduction ..................................................................... 1
Governing Legal Principles ....................................................... 1
Overview of Guidelines Analysis .................................................. 2
The Agencies’ Focus Is on Competitive Effects .................................... 2
Investigations Are Intensively Fact-Driven, Iterative Processes ...................... 3
The Same Evidence Often Is Relevant to Multiple Elements of the Analysis ........... 3
Commentary Outline ............................................................ 4
1. Market Definition and Concentration ........................................... 5
Mechanics of Market Definition ................................................... 5
The Breadth of Relevant Markets .................................................. 6
Evidentiary Sources for Market Definition .......................................... 9
The Importance of Evidence from and about Customers............................ 9
Evidence of Effects May Be the Analytical Starting Point .......................... 10
Industry Usage of the Word“Market” Is Not Controlling ......................... 11
Market Definition and Integrated Analysis......................................... 12
Market Definition Is Linked to Competitive Effects Analysis....................... 12
Market Definition and Competitive Effects Analyses May Involve the Same Facts .... 14
Integrated Analysis Takes into Account that Defined
Market Boundaries Are Not Necessarily Precise or Rigid ....................... 15
Significance of Concentration and Market Share Statistics ............................ 15
2. The Potential Adverse Competitive Effects of Mergers ......................... 17
Coordinated Interaction ......................................................... 18
Concentration ............................................................... 20
Additional Market Characteristics Relevant to Competitive Analysis ............... 20
Role of Evidence of Past Coordination .......................................... 22
Maverick and Capacity Factors in Coordination.................................. 24
Unilateral Effects ............................................................... 25
Unilateral Effects from Merger to Monopoly..................................... 26
Unilateral Effects Relating to Capacity and Output for Homogeneous Products ...... 27
Unilateral Effects Relating to Pricing of Differentiated Products .................... 27
Unilateral Effects Relating to Auctions .......................................... 31
Unilateral Effects Relating to Bargaining ........................................ 34
iii

3. Entry Analysis ................................................................ 37
Likelihood of Entry ............................................................. 38
Sunk Costs and Risks Associated with Entry..................................... 38
Consumer Products........................................................ 38
Industrial Products ........................................................ 40
Other Significant Obstacles to Successful Entry .................................. 42
Cost Disadvantages of Entrants ................................................ 45
Timeliness of Entry ............................................................. 45
Sufficiency of Entry ............................................................. 46
4. Efficiencies ................................................................... 49
Efficiencies the Agencies Consider ................................................ 49
Merger-Specific Efficiencies ................................................... 49
Cognizable Efficiencies ....................................................... 51
Verification of Efficiency Claims .................................................. 52
Sufficiency of Efficiencies ........................................................ 55
“Out-of-Market” Efficiencies ..................................................... 56
Fixed-Cost Savings ............................................................. 57
Supporting Documentation ...................................................... 59
Referenced Agency Materials ....................................................... 61
Case Index ....................................................................... 63
U.S. Department of Justice Cases ................................................. 63
Federal Trade Commission Cases ................................................. 66
iv

Foreword
Mergers between competing firms, i.e.,
“horizontal” mergers, are a significant dynamic
force in the American economy. The vast majority
of mergers pose no harm to consumers, and many
produce efficiencies that benefit consumers in the
form of lower prices, higher quality goods or
services, or investments in innovation. Efficiencies
such as these enable companies to compete more
effectively, both domestically and overseas.
Fourteen years ago, to describe their
application of the antitrust laws to horizontal
mergers, the Federal Trade Commission and the
U.S. Department of Justice (collectively, the
“Agencies”)—the two federal Agencies
responsible for U.S. antitrust law enforcement—
jointly issued the 1992 Horizontal Merger
Guidelines (the “Guidelines”). In 1997, the
Agencies jointly issued revisions to the Guidelines’
section on Efficiencies. Since these publications
were issued, the Agencies have consistently
applied the Guidelines’ analytical framework to
the horizontal mergers under their review.
Today, to provide greater transparency and
foster deeper understanding regarding antitrust
law enforcement, the Agencies jointly issue this
Commentary on the Guidelines.
The Commentary continues the Agencies’
ongoing efforts to increase the transparency of
their decision-making processes. These efforts
include the Agencies’ joint publication of Merger
Challenges Data, Fiscal Years 1999–2003 (issued
December 18, 2003), the Commission’s subsequent
publication of Horizontal Merger Investigation
Data, Fiscal Years 1996–2003 (issued February 2,
2004 and revised August

31,

2004), the
Department’s Merger Review Process Initiative
(issued October 12, 2001 and revised August 4,
2004), the Reforms

to the Merger Review Process
at the Commission (issued February

16, 2006), and
the Department’s and Commission’s increased use
of explanatory closing statements following
merger investigations.
The Commentary follows on the Agencies’
February 2004 Merger Enforcement Workshop.
Over three days, leading antitrust practitioners
and economists who have examined merger policy
and the Guidelines’ analytical

framework
discussed in detail all sections of the Guidelines.
The Workshop focused on whether the analytical
framework set forth

by the Guidelines adequately
serves the dual

purposes

of leading to appropriate
enforcement decisions on proposed horizontal
mergers, and providing the

antitrust bar and the
business community with reasonably clear
guidance from

which to assess the antitrust
enforcement risks of proposed transactions.
Workshop participants generally agreed that
the analytical framework set out in the Guidelines
is effective

in yielding the right results in
individual cases and in providing advice to parties
considering a merger. Thus, the Agencies
concluded that a revamping of the Guidelines is
neither needed

nor widely desired at this time.
Rather, the Guidelines’ analytic framework has
proved both robust and sufficiently flexible to
allow the Agencies properly to account for the
particular facts presented in each merger
investigation.
The Agencies also have observed that the
antitrust bar and business community would find
useful and beneficial an explication of how the
Agencies apply the Guidelines in particular
investigations. This Commentary is intended to
respond to this important public interest by
enhancing the transparency of the analytical
process by which the Agencies

apply the antitrust
laws to horizontal mergers.
Deborah Platt Majoras
Chairman
Federal Trade Commission
Thomas O. Barnett
Assistant Attorney General for Antitrust
U.S. Department of Justice
March
2006
v

Introduction
Governing Legal Principles
The principal federal antitrust laws applicable
to mergers are section 7 of the Clayton Act, section
1 of the Sherman Act, and section 5 of the Federal
Trade Commission Act. Section 7 proscribes a
merger the effects of which “may be substantially
to lessen competition.” Section 1 prohibits an
agreement that constitutes an unreasonable
“restraint of trade.” Section 5, which the Federal
Trade Commission enforces, proscribes “unfair
m e t h o d s o f c o m p e t i t i o n . ” O v e r m a n y d e c a d e s , t h e
federal courts have provided an expansive body of
case law interpreting these statutes

within the
factual and economic

context of individual cases.
The core concern of the

antitrust laws,
including as they pertain to mergers between
rivals, is the creation or enhancement of market
power. In the context of sellers of goods or
services, “market power” may be defined as the
ability profitably to maintain prices above
competitive levels for a

significant period of time.
Market power may be exercised, however, not
only

by raising price, but also, for example, by
reducing quality or slowing innovation. In
addition, mergers also can create market power on
the buying side of a market. Most mergers
between

rivals do not create or enhance market
power. Many mergers, moreover, enable the
merged firm to reduce its costs and become

more
efficient, which, in turn, may lead to lower prices,
higher quality products, or investments in
innovation. However, the Agencies

challenge
mergers that are likely to create or enhance the
merged firm’s ability—either unilaterally or
through coordination with rivals—to exercise
market power.
Following their mandate under the antitrust
statutory and case law, the Agencies focus their
horizontal merger analysis on whether the
transactions under review are likely to create or
enhance market power. The Guidelines set

forth
the analytical framework

and

standards,
consistent with the law and with economic
learning, that the Agencies use to assess whether
an anticompetitive outcome is likely. The unifying
theme of that assessment is “that mergers should
not be permitted to create or enhance market
power or to facilitate

its exercise.” Guidelines
§ 0.1. The Guidelines are flexible, allowing the
Agencies’ analysis to adapt

as business practices
and economic learning evolve.
In applying the Guidelines to the transactions
that each separately reviews, the Agencies strive
to allow transactions unlikely substantially to
lessen competition to proceed as expeditiously as
possible. The Agencies focus their attention on
quickly identifying those transactions that could
violate the antitrust laws, subjecting those mergers
to greater

scrutiny. Most mergers that pose
significant risk to competition come to the
Agencies’ attention before they are consummated
under the premerger notification and

reporting
requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 15 U.S.C. §

18a
(“HSR”). HSR requires that the parties to a
transaction above a certain size notify the
Agencies before consummation and prohibits
consummation of the transaction until expiration
of one or more waiting periods during which one
of the Agencies reviews

the transaction. The
waiting periods provide the Agencies time to
review a transaction before consummation.
For more than 95% of

the transactions reported
under HSR, the Agencies promptly determine—
i.e., within the initial fifteen- or thirty-day waiting
period that immediately follows HSR filings—that
a

substantial lessening of competition is unlikely.
The Agencies base such expeditious
determinations on material provided as

part of

the
HSR notification, experience from prior
investigations, and other market information. For
many industries, a wealth of information is
available from government reports, trade

directories and publications, and

Internet
resources. For some transactions, the parties
volunteer additional information, and for some,
the Agencies obtain information from non-public
sources. The most important non-public sources
are market participants, especially the parties’
customers, who typically provide information
voluntarily when

the Agencies solicit their
cooperation.
Evidence that the merged firm would have a
relatively high share of

sales (or of

capacity, or of
units, or of another relevant basis for
measurement) or

that the market is relatively
highly concentrated may be particularly
significant to a decision by either of

the Agencies
to

extend a pre-merger investigation pursuant to
HSR by issuing a

request for additional
information (commonly referred to as a “second
request”). A decision to

issue a second request
must be made within the initial

HSR thirty-day
waiting

period (fifteen days for cash tender
offers), or the parties will no longer be prevented
under HSR from consummating their merger. A
second request may be necessary when it is not
possible within thirty days to gather and analyze
the facts necessary to address appropriately the
competitive concerns that may arise at the
threshold of the

investigation, such as when
parties to a merger appear to have relatively high
shares in the market or markets in which

they
compete. Although the ultimate decision of
whether a merger likely will be anticompetitive is
based heavily on evidence of potential
anticompetitive effects, the Agencies find that only
in extraordinary circumstances can they conduct
an extensive competitive effects analysis within
thirty days. That is why market shares

and
concentration levels, which have

some predictive
value, frequently are used as at least a starting
point during the initial waiting period.
Sometimes the Agencies also investigate
consummated mergers, especially when evidence
suggests that

anticompetitive effects may have
resulted from them. The Agencies apply
Guidelines analysis to consummated mergers as
well as to mergers under review pursuant to

HSR.
Overview of Guidelines Analysis
The Guidelines’ five-part organizational
structure has become deeply embedded in
mainstream merger analysis. These parts are: (1)
market definition and concentration; (2) potential
adverse competitive effects; (3) entry analysis; (4)
efficiencies; and (5) failing and exiting assets.
Each of the Guidelines’ sections identifies a
distinct analytical element that the Agencies apply
in an integrated approach to merger review. The
ordering of these elements in the Guidelines,
however, is not itself analytically significant,
because the Agencies do not apply the Guidelines
as a linear, step-by-step progression that
invariably starts with market definition and ends
with efficiencies or failing assets. Analysis of
efficiencies, for example, does not occur “after”
competitive effects or market definition in the
Agencies’ analysis of proposed mergers, but rather
is part of an integrated approach. If

the conditions
necessary for

an anticompetitive effect are not
present—for example, because entry would
reverse that effect before significant time
elapsed—the Agencies terminate their review
because it would

be unnecessary to address all of
the analytical elements.
The chapters that follow, in the context of
specific analytical elements such as market
definition or entry, describe many

principles of
Guidelines analysis that

the Agencies apply in the
course of investigating mergers. Three significant
principles are generally applicable throughout.
The Agencies’ Focus Is on
Competitive Effects
The Guidelines’ integrated process is “a tool
that allows the Agency to answer the ultimate
inquiry in merger analysis: whether the merger is
likely to create or enhance market power or
facilitate its exercise.” Guidelines § 0.2. At the
center of the Agencies’ application of the
Guidelines, therefore, is competitive effects
analysis. That

inquiry directly addresses the key
question that the Agencies must answer: Is the
merger under review likely substantially to lessen
competition? To this end, the Agencies examine
whether the merger of two particular rivals
matters, that is, whether the merger is likely to
affect adversely the competitive process, resulting
in higher prices, lower quality, or reduced
innovation.
The Guidelines identify two broad analytical
frameworks for assessing whether a merger
between competing firms may substantially lessen
competition. These frameworks require that the
2

Agencies ask whether the merger may increase
market power by facilitating coordinated
interaction among rival firms and whether the
merger may enable the merged firm unilaterally to
raise price or otherwise exercise market power.
Together, these two frameworks are intended to
embrace every

competitive effect of any form of
horizontal merger. The Guidelines were never
intended to detail how the Agencies would assess
every set of circumstances

that a proposed merger
may present. As the Guidelines themselves note,
the specific standards set forth therein must be
applied to a broad range of possible factual
circumstances.
Investigations Are Intensively
Fact-Driven, Iterative Processes
Merger analysis depends

heavily on the
specific facts of

each

case. At the outset of an
investigation, when Agency staff may know
relatively little about the merging firms, their
products, their rivals, or the applicable relevant
markets, staff typically contemplates several broad
hypotheses of possible harm.
For example, based on initial information, staff
may hypothesize that a merger would reduce the
number of competitors from four to

three and, in
so doing, may foster or enhance coordination by
enabling the remaining firms profitably to allocate
customers based on prior sales. Staff also

might
hypothesize that the products of the merging firms
are particularly close substitutes with respect to
product characteristics or geographic location such
that unilateral anticompetitive effects are likely.
Staff

evaluates potential competitive factors of
this sort by gathering additional information and
conducting intensive factual analysis to assess
both the applicability of individual analytical
frameworks and their implications for the likely
competitive effects of the merger. As it learns
more about the merging firms and the market
environment in which they compete, staff rejects
or refines its hypotheses of probable relevant
markets and competitive effects, ultimately
resulting in a conclusion about likelihood of harm.
If the facts do not point to such a likelihood, the
merger investigation is closed.
In testing a particular postulated risk of
competitive harm arising from a merger, the
Agencies take into account pertinent
characteristics of the market’s competitive process
using data, documents, and other information
obtained from the parties, their competitors, their
customers, databases of various sorts, and
academic literature or private industry studies.
The Agencies carefully consider the views of
informed customers on market structure, the
competitive process,

and anticipated effects from
the merger. The Agencies further consider any
information voluntarily provided by the parties,
which may include extensive analyses prepared
by economists or in consultation with economists.
The Agencies also carefully consider prospects for
efficiencies that the proposed transaction may
generate and evaluate the effects of any
efficiencies on the outcome of the competitive
process.
The Same Evidence Often Is Relevant
to Multiple Elements of the Analysis
A single piece of evidence often is relevant

to
several issues in the assessment of a proposed
merger. For example, mergers frequently occur in
markets that have experienced prior mergers.
Sometimes evidence exists concerning the effects
of prior mergers on various attributes of
competition. Such evidence may be probative, for
example, of the scope of the relevant product and
geographic markets, of the likely competitive
effects of the proposed merger, and of the
likelihood that entry would deter or counteract
any attempted exercise of market power following
the merger under review. Similarly, evidence of
actual or likely anticompetitive effects from a
merger could be used in addressing the scope of
the market or entry conditions.
An investigation involving potential
coordinated effects may uncover evidence of past
collusion and sustained supra-competitive prices
in the market. This information can be relevant to
several elements of the analysis. The product and
geographic markets that were subject to collusion
in the past may be probative of the relevant
product and geographic markets today. That
entry failed to undermine collusion in the past
may be probative of whether entry is likely today.
Of course, during its investigation, the Agency
may discover facts that

tend to negate these
possibilities. For example, since collusion
occurred, new production technologies may have
emerged that have altered the ability or incentives
of firms to coordinate

their actions. Similarly,
innovation may have led to the introduction of
3

new products that compete with the incumbent
products and constrain the ability of the merging
firms and their rivals to coordinate successfully in
the future.
Commentary Outline
In the chapters that follow, the Commentary
explains how the Agencies have applied particular
Guidelines’ provisions relating to market
definition and concentration, competitive effects
(including coordinated interaction and unilateral
effects analysis), entry conditions, and efficiencies.
Application of the Guidelines’ provisions relating
to failure and exiting assets is not discussed in the
Commentary because those provisions are very
infrequently applied. For convenience, the order
of these chapters follows the order of the issues set
forth in the Guidelines.
Included throughout the Commentary are
short summaries of matters that the Agencies have
investigated. They have been included to further
understanding of the principles under discussion
at that point in the narrative. None of the
summaries exhaustively addresses all the
pertinent facts or issues that arose in the
investigation. No other significance should be
attributed to the selection of the matters used as
examples. (In some instances in the Efficiencies
chapter, names and other key facts of actual
matters are changed to protect the confidentiality
of business and proprietary information. Each is
noted as

a “Disguised Example.”) An Index at the
end of the Commentary lists all of the mergers
discussed in these case examples and provides
citations to additional

public information.
For the reader’s convenience, the case
examples briefly state how each investigation
ended, i.e., whether it was closed because the
Agency determined not to challenge the merger or
because the parties abandoned the merger in
response to imminent Agency challenge, or
whether the investigation proceeded to

a consent
agreement or to litigation.

The discussion within
each case

example pertains solely to the relevant
Agency’s analysis of the merger, and does not
elaborate on any subsequent judicial

or
administrative proceedings.
4

1. Market Definition and
Concentration
The Agencies evaluate a merger’s likely
competitive effects “within the context of
economically significant markets—i.e., markets
that could be subject to the exercise of market
power.” Guidelines § 1.0. The purpose of merger
analysis under the Guidelines is to identify those
mergers that are likely to create or enhance market
power

in

any market. The Agencies therefore
examine all plausible markets to determine
whether an adverse competitive effect is likely to
occur

in any of them. The market definition
process is not isolated from the other analytic
components in the Guidelines. The Agencies do
not settle on a relevant market definition before
proceeding to

address other issues. Rather,
market definition is part of

the integrated process
by which the Agencies apply Guidelines
principles, iterated as new facts are learned, to
reach an understanding of the merger’s likely
effect on competition.
The mechanics of how the Agencies define
markets using the Guidelines method

has

been the
subject of extensive discussion in legal and
economic literature and appears to be well
understood

in the antitrust community. This
Commentary, accordingly, provides only a brief
overview of the mechanics.

The remainder of

this
chapter addresses a

number of discrete topics
concerning market definition issues that
frequently arise in merger investigations.
Mechanics of Market Definition
The Guidelines define a market as “a product
or group

of products and a geographic area in
which it is produced or sold such

that a
hypothetical profit-maximizing firm, not subject to
price regulation, that was the only present

and
future producer or seller of those

products in that
area likely would impose at least a ‘small

but
significant and nontransitory’ increase in price,
assuming the terms of sale of all other products
are held constant.” Guidelines § 1.0.
This approach to market definition is referred
to as the “hypothetical monopolist” test. To
determine the effects of this “‘small but significant
and nontransitory’ increase

in price” (commonly
referred to

as

a “SSNIP”), the Agencies generally
use a price increase

of five percent. This test
identifies which product(s) in which geographic
locations significantly constrain the

price of the
merging firms’ products.
The Guidelines’ method for implementing

the
hypothetical monopolist test starts by identifying
each product produced or sold by each

of the
merging firms. Then, for each product, it
iteratively broadens the candidate market by
adding the next-best substitute.

A relevant
product market emerges as the smallest

group of
products that satisfies the hypothetical monopolist
test. Product market definition depends critically
upon demand-side substitution—i.e., consumers’
willingness to switch from one product to another
in reaction to price changes. The Guidelines’
approach to market definition reflects the
separation of demand substitutability from supply
substitutability—i.e., the ability and willingness,
given existing capacity, of firms to substitute from
making one product to producing another in
reaction to a price change. Under this approach,
demand substitutability is the concern of market
delineation, while supply substitutability and
entry are concerned with current and future
market participants.
Definition of

the relevant geographic market is
undertaken in

much the same way as product
market definition—by identifying the narrowest
possible market and then broadening it by
5

iteratively adding the next-best substitutes. Thus,
for geographic market definition, the Agencies
begin with the area(s)

in which the merging firms
compete respecting each relevant product, and
extend

the boundaries of those areas until an

area
is determined within which a

hypothetical
monopolist would raise prices by at least

a small
but significant and non-transitory amount.
Da
Vita–Gambro (FTC 2005) DaVita Inc.,
proposed to acquire Gambro Healthcare, Inc.
The firms competed across the United States in
the provision of outpatient dialysis services for
persons with end stage renal disease (“ESRD”).
Commission staff found that the relevant
geographic markets within which to analyze
the transaction’s likely competitive effects were
local. Most ESRD patients receive treatments
about 3 times per week, in sessions lasting 3–5
hours, and in general either are unwilling or
unable to travel more than 30 miles or 30
minutes to receive kidney dialysis treatment.
In the process of defining the geographic
market, staff identified the Metropolitan
Statistical Areas (“MSAs”) within which both
firms had outpatient dialysis clinics, then
examined each area to determine if geographic
factors such as mountains, rivers, and bays,
and travel conditions, were such that the scope
of the relevant market differed from the MSA’s
boundaries.
Within each such MSA, staff isolated the
area immediately surrounding each dialysis
clinic of both merging parties, and assessed
whether a hypothetical monopolist within that
area would impose a significant price increase.
Staff expanded the boundaries of each area
until the evidence showed that such a
hypothetical monopolist would impose a
significant price increase. From interviews
with industry participants and analysis of
documents, staff found that, in general,
dialysis patients tend to travel greater
distances in rural and suburban areas than in
dense urban areas, where travel distances as
small as 5–10 miles may take significantly more
than 30 minutes, due to congestion, road
conditions, reliance on public transportation,
and other factors. Maps indicating the
locations from which each clinic drew its
patients were particularly useful. Thus, some
MSAs included within their respective
boundaries many distinct areas over which a
hypothetical monopolist

would exercise
market power. The Commission entered into
a consent agreement with

the parties to resolve
the concern that the transaction would

likely
lead to anticompetitive effects in 35 local
markets. In an order issued with the consent
agreement, the Commission required, among
other

things, the divestiture of dialysis clinics
in the 35 markets at issue.
The Breadth of Relevant Markets
Defining markets under the Guidelines’
method does not necessarily result in markets that
include the full range of functional substitutes
from which customers choose. That is because, as
the Guidelines provide, a “relevant market is a
group of products and a geographic area that is no
bigger than necessary to satisfy [the hypothetical
monopolist] test.” Guidelines § 1.0. This is one of
several points at which the Guidelines articulate
what is referred to in section 1.21 as the “‘smallest
market’ principle” for determining the relevant
market. The Agencies frequently conclude that a
relatively narrow range of products or geographic
space within a larger group describes the
competitive arena within which significant
anticompetitive effects are possible.
Nestle–Dreyer’s (FTC 2003) Nestle Holdings,
Inc., proposed to merge with Dreyer’s Grand
Ice Cream, Inc. The firms were rivals in the
sale of superpremium ice cream. Ice cream is
differentiated on the basis of the quality of
ingredients. Compared to premium and non-
premium ice cream, superpremium ice cream
contains more butterfat, less air, and more
costly ingredients. Superpremium ice cream
sells at a substantially higher price than
premium ice cream. Using scanner data,
Commission staff estimated demand
elasticities for the superpremium, premium,
and economy ice cream segments. Staff’s
analysis showed that a hypothetical
monopolist of superpremium ice cream would
increase prices significantly. This, together
with other documentary and testimonial
evidence, indicated that the relevant market in
which to analyze the transaction was
superpremium ice cream. The Commission
entered into a consent agreement with the
merging firms, requiring divestiture of two
6

brands and of key distribution assets.
UPM–MACtac (DOJ 2003) UPM-Kymmene
Oyj sought to acquire (from Bemis Co.)
Morgan Adhesives Co. (“MACtac”). They
were two of the three largest producers of
paper pressure-sensitive labelstock, from
which “converters” make pressure-sensitive
labels. End users peel pressure-sensitive labels
off a silicon-coated base material and directly
apply them to items being labeled. The
Department challenged the acquisition on the
basis of likely anticompetitive effects in two
relevant product markets. One was paper
labelstock used to make pressure sensitive
labels for “variable information printing”
(“VIP”). Some or all of the printing on VIP
labels is done by end users as the label is
applied. A familiar example is the price
labeling of fresh meat sold in supermarkets.
Although paper labelstock for VIP labels
competes with plastic film labelstock, the
Department found that film labels are of
sufficiently higher cost that a hypothetical
monopolist of paper labelstock for VIP labels
would raise price significantly. The other
relevant product market was paper labelstock
used for “prime” labels. Prime labels are used
for product identification and are printed in
advance of application. Paper labelstock for
prime labels, competes not just with film
labelstock, but also with pre-printed packaging
and other means of product identification.
Nevertheless, the Department found that a
hypothetical monopolist of paper labelstock for
prime labels would raise price significantly
because users of pressure-sensitive paper
labels find them the least-cost alternative for
their particular applications and because they
would have to incur significant switching costs
if they adopted an alternative means of
product identification. After trial, the court
enjoined the consummation of the acquisition.
Tenet–Slidell (FTC 2003) Tenet Health Care
Systems owned a hospital in Slidell, Louisiana
(near New Orleans), and proposed to acquire
Slidell’s only other full-service hospital. There
were many other full-service hospitals in the
New Orleans area but all were outside of
Slidell. Commission staff found that a
significant number of Slidell residents and
their employers required access to either of the
two Slidell hospitals in their private health
insurance plans. The Slidell hospitals
competed against each other for inclusion in
health plan networks. After merging, the
combined hospital would have had no rival
with “must have” network status among
Slidell residents and employers. A
hypothetical monopolist of the Slidell hospitals
likely would have imposed a small but
significant and non-transitory price increase on
health plans selling coverage in Slidell, because
neighboring hospitals outside of Slidell were
not effective substitutes for network inclusion.
The relevant geographic market, therefore, was
limited to hospitals located in Slidell. Under
Louisiana law, proposed acquisitions of not-
for-profit hospitals must be approved by the
Louisiana Attorney General. By invitation of
the state Attorney General, Commission staff,
in a public letter authorized by the
Commission, advised the Attorney General of
the staff’s view that, based on the facts
gathered in its then-ongoing investigation, the
proposed acquisition raised serious
competitive concerns. In a vote authorized by
local law, parish residents subsequently
rejected the proposed transaction, which never
was consummated.
In sections

1.12 and 1.22, the Guidelines
explain that the Agencies may define relevant
markets on the

basis of price discrimination if a
hypothetical monopolist likely would exercise
market power only, or especially, in sales to
particular customers or in particular geographic
areas.

The Agencies address the same basic issues
for

any form of discrimination: Would price
discrimination, if feasible, permit a significantly
greater exercise of market power? Could
competitors successfully identify the transactions
to be discriminated against? Would customers or
third parties be

able to undermine substantially
the discrimination through some form of arbitrage
in

which a product sold at lower prices to some
customer groups is resold

to customer groups
intended by the firms to pay higher prices? In
cases in which a hypothetical monopolist is likely
to

target only a subset of customers for
anticompetitive price increases, the Agencies are
likely to identify relevant markets based on the
ability of sellers to price discriminate.
7

Quest–Unilab (FTC 2003) Quest Diagnostics,
Inc. and Unilab Corp., the two leading
providers of clinical laboratory testing services
to physician groups in Northern California,
proposed to merge. Their combined market
share would have exceeded 70%; the next
largest rival had a market share of 4%. Clinical
laboratory testing services are marketed and
sold to various groups of customers, including
physicians, health insurers, and hospitals.
Commission staff determined that purchasers
of these services cannot economically resell
them to other customers, and that suppliers of
the services can potentially identify the
competitive alternatives available to physician
group customers according to the group’s base
of physicians and geographic coverage. This
information indicated that a hypothetical
monopolist could discriminate on price among
customer types. Suppliers’ ability to price
discriminate, combined with the fact that some
types of customers had few competitive
alternatives to contracting with suppliers that
had a network of locations, led staff to define
markets based on customer categories. The
Commission issued a complaint alleging that
the transaction would lessen competition
substantially in one of the customer categories:
the provision of clinical laboratory testing
services to physician groups in Northern
California. An accompanying consent order
required divestiture of assets used to provide
clinical laboratory testing services to physician
groups in Northern California.
Ingersoll-Dresser–Flowserve (DOJ 2000)
Flowserve Corp. agreed to acquire Ingersoll-
Dresser Pump Co. Both firms produced a
broad array of pumps used in industrial
processes. The Department challenged the
proposed acquisition on the basis of likely
anticompetitive effects in “API 610” pumps,
which are used by oil refineries, and pumps
used in electric power plants. Both sorts of
pumps are customized according to the
specifications of the particular buyer and are
sold through bidding mechanisms.
Customization of the pumps made arbitrage
infeasible. The Department concluded that the
competition in each procurement was entirely
distinct and therefore that each procurement
took place in a separate and distinct relevant
market. The Department’s challenge to the
merger was resolved by consent decree.
Interstate Bakeries–Continental (DOJ 1995)
The Department challenged Interstate Bakeries
Corp.’s purchase of Continental Baking Co.
from Ralston Purina Co. The challenge
focused on white pan bread, and the
Department found that the purchase likely
would have produced significant price
increases in five metropolitan areas—Chicago,
Milwaukee, Central Illinois, Los Angeles, and
San Diego. Among the reasons the
Department concluded that competition was
localized to these metropolitan areas were that
bakers charged different prices for the same
brands produced in the same bakeries,
depending on where the bread was sold, and
that arbitrage was infeasible. Arbitrage was
exceptionally costly because the bakers
themselves placed their bread on the
supermarket shelves, so arbitrage required
removing bread from the shelves, reshipping
it, and reshelving it. This process also would
consume a significant portion of the brief
period during which the bread is fresh. The
Department settled its challenge to the
proposed merger by a consent decree requiring
divestiture of brands and related assets in the
five metropolitan areas.
The Guidelines indicate that the

relevant
market is the smallest

collection of products and
geographic areas within which a hypothetical
monopolist would raise

price significantly. At
times, the Agencies may act conservatively and
focus on a market definition that

might not be the
smallest possible relevant market. For

example,
the Agencies may focus initially on a bright line
identifying a group of products or areas within
which it is

clear that a hypothetical monopolist
would raise

price significantly and seek to
determine whether anticompetitive effects are—or
are not—likely to result from

the transaction in
such

a

candidate market. If the answer for the
broader market is likely to be the same as for any
plausible smaller relevant market, there is

no need
to pinpoint the smallest

market as the precise line
drawn does not affect the determination of
whether a merger is anticompetitive.

Also, when
the analysis is identical across products or
geographic

areas that could each be defined as
separate relevant markets using the smallest
market principle, the Agencies

may elect to
8

employ a broader market definition

that
encompasses many products or geographic

areas
to avoid

redundancy in presentation. The
Guidelines describe this practice of aggregation
“as a matter of convenience.” Guidelines § 1.321
n.14.
Evidentiary Sources for
Market Definition
The Importance of Evidence
from and about Customers
Customers typically are the best source, and in
some cases they may be the only source, of critical
information on the factors that govern their ability
and willingness to substitute in the event of a price
increase. The Agencies routinely solicit
information from customers regarding their
product and supplier selections. In selecting their
suppliers, customers typically evaluate the
alternatives available to them and can often
provide the Agencies with

information on their
functional needs as well as on the cost and
availability of substitutes. Customers also provide
relevant information that they uniquely possess on
how they choose products and suppliers.

In some
investigations, customers provide useful
information on how they have responded

to
previous significant changes in circumstances.

In
some investigations, the Agencies are able to
explore consumer preferences with the aid of price
and quantity data that allow econometric
estimation of the relevant elasticities of demand.
Dairy Farmers–SODIAAL (DOJ 2000) The
Department challenged the proposed
acquisition by Dairy Farmers of America, Inc.
of SODIAAL North America Corp. on the basis
of likely anticompetitive effects in the sale of
“branded stick and whipped butter in the
Philadelphia and New York metropolitan
areas.” DFA sold the Breakstone brand, and
SODIAAL sold the Keller’s and Hotel Bar
brands. The Department concluded that
consumers of branded butter in these
metropolitan areas so preferred it over private-
label butter, as well as margarine and other
substitutes, that a hypothetical monopolist
over just branded butter in each of those areas
would raise price significantly. This
conclusion was supported by econometric
evidence, derived from data collected from
supermarkets, on the elasticity of demand for
branded butter in Philadelphia and New York.
The Department’s complaint was resolved by
a consent decree transferring the SODIAAL
assets to a new company not wholly owned by
DFA and containing additional injunctive
provisions.
In the vast majority of cases, the Agencies
largely rely on non-econometric evidence,
obtained primarily from customers and

from
business documents.
Cem
ex–RMC (FTC 2005) The proposed
acquisition of RMC Group PLC by Cemex, S.A.
de C.V. would have combined two of the three
independent ready-mix concrete suppliers in
Tucson, Arizona. Ready-mix concrete is a
precise mixture of cement, aggregates, and
water. It is produced at local plants and
delivered as a slurry in trucks with revolving
drums to construction sites, where it is poured
and formed into its final shape. Commission
staff determined from information received
from customers that a hypothetical monopolist
over ready-mix concrete would raise price
significantly in the relevant area. Asphalt and
other building materials were found not to be
good substitutes for ready-mix concrete, due in
significant part to concrete’s pliability when
freshly mixed and strength and permanence
when hardened. Concerned that the
transaction likely would result in coordinated
interaction in the Tucson area, the
Commission, pursuant to a consent agreement,
ordered Cemex, among other things, to divest
RMC’s Tucson-area ready-mix concrete assets.
Swedish Match–National (FTC 2000) S w e d i s h
Match North America, Inc. proposed to acquire
National Tobacco Company, L.P. The
acquisition would have combined the first- and
third-largest producers of loose leaf chewing
tobacco in the United States. Commission staff
evaluated whether, as the merging firms
contended, moist snuff should be included in
the relevant market for loose leaf chewing
tobacco. Swedish Match’s own market
research revealed that consumers would
substitute less expensive loose leaf, but not
more expensive snuff, if loose leaf prices
increased slightly. Additional evidence from
9

the firms’ own business documents, and
customer testimony from distributors that
purchase and resell the products to retailers,
demonstrated that loose leaf chewing tobacco
constitutes a distinct product market that does
not include moist snuff. The acquisition would
therefore have resulted in a merged firm with
a high share of the relevant market for loose
leaf chewing tobacco. The Commission
successfully challenged the merger in federal
district court.
In determining whether to challenge a
transaction, the Agencies do not simply tally the
number of customers that oppose a transaction
and the number of customers that support it. The
Agencies take into account that all customers in a
relevant market are not necessarily situated
similarly in terms of their incentives. For example,
intermediate resellers’ views about a proposed
merger between two suppliers may be influenced
by the resellers’ ability profitably to pass along a
price increase. If resellers can

profitably pass
along a price increase, they

may have no objection
to the merger. End-users, by contrast, generally
lack such an

incentive because they must absorb
higher prices. In all cases, the Agencies credit
customer testimony only to the extent the
Agencies conclude that there is a sound
foundation for the testimony.
Evidence of Effects May Be the
Analytical Starting Point
In some investigations, before having
determined the relevant market boundaries, the
Agencies may have evidence that more directly
answers the “ultimate inquiry in merger analysis,”
i.e., “whether the merger is likely to create or
enhance market power or facilitate its exercise.”
Guidelines § 0.2. Evidence pointing directly
toward competitive effects may arise from
statistical analysis of price and quantity data
related to, among other things, incumbent
responses to prior events (sometimes called
“natural experiments”) such as entry or exit by
rivals. For example, it may be that one of the
merging parties recently entered and that
econometric tools applied to pricing data show
that the other merging party responded to that
entry by reducing price by a significant amount
and on a nontransitory basis while the prices of
some other sellers that might be in the relevant
market did not.
To be probative, of course, such data analyses
must be based on accepted economic principles,
valid statistical techniques, and reliable data.
Moreover, the Agencies accord weight to such
analyses only within the context of the full
investigatory record, including information and
testimony received from customers and other
industry participants and from business
documents.
Evidence pertaining more directly to a
merger’s actual or likely competitive effects also
may be useful in determining the relevant market
in which effects are likely. Such evidence may
identify potential relevant markets and
significantly reinforce or undermine other
evidence relating to market definition.
Staples–Office Depot (FTC 1997) Staples, Inc.
proposed to acquire Office Depot, Inc., a
merger that would have combined two of the
three national retail chains of office supply
superstores. The Commission found that in
metropolitan areas where Staples faced no
office superstore rival, it charged significantly
higher prices than in metropolitan areas where
it faced competition from Office Depot or the
other office supply superstore chain,
OfficeMax. Office Depot data showed a
similar pattern: its prices were lowest where
Staples and OfficeMax also operated, and
highest where they did not. These patterns
held regardless of how many non-superstore
sellers of office supplies operated in the
metropolitan area under review.
The Commission also found that evidence
relating to entry showed that local rivalry from
office supply superstores acted as the principal
competitive constraint on Staples and Office
Depot. Each firm regularly dropped prices in
areas where they confronted entry by another
office supply superstore, but did not do so in
response to entry by other sellers of office
supplies, such as Wal-Mart. Newspaper
advertising and other promotional materials
likewise reflected greater price competition in
those areas in which Staples and Office Depot
faced local rivalry from one another or from
OfficeMax. Such evidence provided direct
support for the conclusion that the acquisition
would cause anticompetitive effects in the
relevant product market defined as the sale of
10

consumable office supplies through office
supply superstores, in those metropolitan areas
where Staples and Office Depot competed
prior to the merger. The Commission
successfully challenged the merger in federal
district court.
In some cases, competitive effects analysis may
eliminate the need to identify with specificity the
appropriate relevant market definition, because,
for example, the analysis shows that
anticompetitive effects are unlikely in any
plausibly defined market.
Federated–May (FTC 2005) Federated
Department Stores, Inc. proposed to acquire
The May Department Stores Co., thereby
combining the two largest chains in the United
States of so-called “traditional” or
“conventional” department stores.
Conventional department stores typically
anchor enclosed shopping malls, feature
products in the mid-range of price and quality,
and sell a wide range of products. The
transaction would create high levels of
concentration among conventional department
stores in many metropolitan areas of the
United States, and the merged firm would
become the only conventional department
store at certain of the 1,200 malls in the United
States.
If the relevant product market included
only conventional department stores, then
before the merger Federated had a market
share greater than 90% in the New York–New
Jersey metropolitan area. If the relevant
product market also included, for example,
specialty stores, then Federated’s share in that
geographic area was much smaller. The
evidence that Commission staff obtained
indicated that the relevant product market was
broader than conventional department stores.
For example, in the New York–New Jersey
metropolitan area, Federated charged
consumers the same prices that it charged
throughout much of the eastern region of the
United States, including where Federated
faced larger numbers of traditional department
store rivals. May and other department store
chains, like Federated, also set prices to
consumers that were uniform over very broad
geographic areas and did not appear to vary
local prices based on the number or identity of
conventional department stores in malls or
metropolitan areas.
This evidence provided support for the
conclusion that the acquisition likely would not
create anticompetitive effects. Staff also found
no evidence that competitive constraints, e.g.,
rivalry from retailers other than department
stores, in New York–New Jersey were not
representative of other markets in which
Federated and May competed. Further,
evidence pertaining both to which firms the
parties monitored for pricing and to consumer
purchasing behavior also supported the
conclusion that the relevant market was
sufficiently broad that the merger was not
likely to cause anticompetitive effects. The
Commission closed the investigation.
Industry Usage of the Word
“Market” Is Not Controlling
Relevant market definition is, in the antitrust
context, a technical exercise involving analysis of
customer substitution in response to price
increases; the “markets” resulting from this
definition process are specifically designed to
analyze market power issues. References to a
“market” in business documents may provide
important insights into the identity of firms,
products, or regions that key industry participants
consider to be sources of rivalry, which in turn
may be highly probative evidence upon which to
define the “relevant market” for antitrust
purposes. The Agencies are careful, however, not
to assume that a “market” identified for business
purposes is the same as a relevant market defined
in the context of a merger analysis. When
businesses and their customers use the word
“market,” they generally are not referring to a
product or geographic market in the precise sense
used in the Guidelines, although what they term
a “market” may be congruent with a Guidelines’
market.
Staples–Office Depot (FTC 1997) In the
blocked Staples–Office Depot transaction
described above in this Chapter, the
Commission alleged, and the district court
found, that the relevant product market was
“the sale of consumable office supplies
through office supply superstores,” with
“consumable” meaning products that
11

consumers buy recurrently, like pens, paper,
and file folders. Industry members in the
ordinary course of business did not describe
the “market” using this phrase. The facts
showed that a hypothetical monopolist office
supply superstore would raise price
significantly on consumable office supplies.
Many retail firms that are not office supply
superstores—such as discount and general
merchandise stores—sold consumable office
supplies in areas near the merging firms.
Despite the existence of such other sellers,
evidence, including the facts identified above,
justified definition of the relevant product
market as one limited to the sale of consumable
office products solely through office supply
superstores.
It is unremarkable that “markets” in common
business usage do not always coincide with
“markets” in an antitrust context, inasmuch as the
terms are used for different purposes. The
description of an “antitrust market” sometimes
requires several qualifying words and as such
does not reflect common business usage of the
word “market.” Antitrust markets are entirely
appropriate to the extent that they realistically
describe the range of products and geographic
areas within which a hypothetical monopolist
would raise price significantly and in which a
merger’s likely competitive effects would be felt.
Waste Management–Allied (DOJ 2003) Waste
Management, Inc. agreed to acquire assets
from Allied Waste Industries, Inc. that were
used in its municipal solid waste collection
operations in Broward County, Florida. The
Department challenged the proposed
acquisition on the basis of anticompetitive
effects in “small container commercial
hauling.” Commercial haulers serve customers
such as office buildings, apartment buildings,
and retail establishments. Small containers
have capacities of 1–10 cubic yards, and waste
from them is collected using specialized, front-
end loading vehicles. The Department found
that this market was separate and distinct from
markets for other municipal solid waste
collection services. The Department concluded
that a hypothetical monopolist in just small
container commercial hauling would have
raised prices significantly because it was
uneconomical for homeowners to use the much
larger containers used by commercial
customers and uneconomical for commercial
customers using large “roll-off” containers to
switch to small commercial containers. The
Department’s challenge to the merger was
resolved by a consent decree requiring
divestiture of specified collection routes and
the assets used on them.
Pacific Enterprises–Enova (DOJ 1998) Pacific
Enterprises (which owned Southern California
Gas Co.) and Enova Corp. (which owned San
Diego Gas & Electric Co.) agreed to combine
the companies under a common holding
company. The Department challenged the
combination on the basis of likely
anticompetitive effects arising from the ability
of the combined companies to raise electricity
prices by restricting the supply of natural gas.
The Department concluded that the relevant
market was the sale of electricity in California
during periods of high demand. In high-
demand periods, limitations on transmission
capacity cause prices in California to be
determined by power plants in California.
Inter-temporal arbitrage was infeasible because
there is only a very limited opportunity to
store electric power. Thus, the Department
concluded that a hypothetical electricity
monopolist during just periods of high
demand would raise prices significantly. The
Department’s complaint was resolved by a
consent decree requiring divestiture of
generating facilities and associated assets.
Market Definition and
Integrated Analysis
Market Definition Is Linked to
Competitive Effects Analysis
The process of defining the relevant market is
directly linked to competitive effects analysis. In
analyzing mergers, the Agencies identify specific
risks of potential anticompetitive harm, and
delineate the appropriate markets within which to
evaluate the likelihood of such potential harm.
This process could lead to different conclusions
about the relevant markets likely to experience
competitive harm for two similar mergers within
the same industry.
12

Thrifty–PayLess (FTC 1994) A proposed
merger of Thrifty Drug Stores and PayLess
Drug Stores would have combined retail drug
store chains with store locations near one
another in towns in California, Oregon, and
Washington. Commission staff identified two
potential anticompetitive effects from the
merger: (1) that “cash” customers, i.e.,
individual consumers who pay out of pocket
for prescription drugs, likely would pay higher
prices; and (2) that third-party payers, such as
health plans and pharmacy benefit managers
(“PBMs”), likely would pay higher dispensing
fees to chain pharmacy firms to obtain their
participation in provider networks.
Cash customers tend to shop close to home
or place of employment, suggesting small
geographic markets for those customers.
Third-party payers need network participation
from chains having wide territorial coverage.
The staff assessed different relevant markets
for the two risks of competitive harm. In its
complaint accompanying a consent agreement,
the Commission alleged that the sale of
prescription drugs in retail stores (i.e., sales to
cash customers) was a relevant product market
and that anticompetitive effects from the
merger were likely in this market. The
Commission did not allege a diminution in
competition regarding the process by which
pharmacies negotiate for inclusion in health
plan provider networks and sought no relief in
that market. The Commission ordered Thrifty,
among other things, to divest retail pharmacies
in the geographic markets of concern.
Rite Aid–Revco (FTC 1996) The nation’s two
largest retail drug store chains, Rite Aid Corp.
and Revco D.S., Inc., proposed to merge. They
competed in many local markets, including in
15 metropolitan areas in which the merged
firm would have had more than 35% of the
retail pharmacies. As in the foregoing
Thrifty–PayLess matter, Commission staff
defined two markets in which harm potentially
may have resulted: retail sales made to cash
customers, and sales through PBMs, which
contract with multiple pharmacy firms to form
networks offering pharmacy benefits as part of
health insurance coverage. Pharmacy
networks often include a high percentage of
local pharmacies because access to many
participating pharmacies is often important to
plan enrollees.
Rite Aid and Revco constrained one
another’s pricing leverage with PBMs in
bargaining for inclusion in PBM networks.
Each merging firm offered rival broad local
coverage of pharmacy locations, such that
PBMs could assemble marketable networks
with just one of the firms included. A high
proportion of PBM plan enrollees would have
considered the merged entity to be their
preferred pharmacy chain, leaving PBMs with
less attractive options for assembling networks
that did not include the merged firm. This
would have empowered the merged firm
successfully to charge higher dispensing fees as
a condition of participating in a network.
Commission staff determined that the
merger was likely substantially to lessen
competition in the relevant market of sales to
PBMs and similar customers who needed a
network of pharmacies. The Commission
voted to challenge the merger, stating that “the
proposed Rite Aid-Revco merger is the first
drug store merger where the focus has been on
anticompetitive price increases to the growing
numbers of employees covered by these
pharmacy benefit plans, rather than
exclusively focusing on the cash paying
customer.” The parties subsequently
abandoned the deal.
Many mergers, in a wide variety of industries,
potentially have effects in more than one relevant
geographic market or product market and require
independent competitive assessments for each
market.
Suiza–Broughton (DOJ 1998) T h e D e p a r t m e n t
challenged the proposed acquisition of
Broughton Foods Co. by Suiza Foods Corp.
Suiza was a nationwide operator of milk
processing plants with four dairies in Kentucky
and Tennessee. Broughton operated two
dairies, including the Southern Belle Dairy in
Pulaski County, Kentucky. The two companies
competed in the sale of milk and other dairy
products to grocery stores, convenience stores,
schools, and institutions. The Department’s
investigation focused on schools, many of
which require daily, or every-other-day,
delivery. School districts procured the milk
through annual contracts, each of which the
13

Department found to be an entirely separate
competition. Thus, the Department defined 55
relevant markets, each consisting of a school
district in south central Kentucky in which the
proposed merger threatened competition. The
Department’s complaint was resolved by a
consent decree requiring divestiture of the
Southern Belle Dairy.
NAT, L.C.–D.R. Partners (DOJ 1995) The
Department and private plaintiffs challenged
the consummated acquisition of the Northwest
Arkansas Times by interests owning the
competing Morning News of Northwest Arkansas.
The Department concluded that the acquisition
likely would harm subscribers of these
newspapers as well as local advertisers, and
defined separate relevant markets for readers
and local advertisers. The Department found
that both markets included only daily
newspapers because of unique characteristics
valued by readers and local advertisers, and
concluded that the acquisition likely would
harm both groups of customers. The courts
required rescission of the acquisition.
Market Definition and
Competitive Effects Analyses
May Involve the Same Facts
Often the same information is relevant to
multiple aspects of the analysis. For example,
regarding mergers that raise the concern that the
merged firm would be able to exercise unilateral
market power, the Agencies often use the same
data and information both to define the relevant
market and to ascertain whether the merger is
likely to have a significant unilateral
anticompetitive effect.
General Mills–Pillsbury (FTC 2001) General
Mills, Inc. proposed to acquire The Pillsbury
Co. General Mills owned the Betty Crocker
brand of pancake mix and the Bisquick brand
of all-purpose baking mix, a product that can
be used to make pancakes as well as other
products. Pillsbury owned the Hungry Jack
pancake mix brand. An issue was whether the
relevant product market for pancake mixes
included Bisquick. General Mills’ Betty
Crocker pancake mix had a relatively small
share of a candidate pancake mix market that
excluded Bisquick, suggesting that the merger
likely would not raise significant antitrust
concerns in the candidate pancake mix market
should the relevant market exclude Bisquick.
In addition to obtaining information from
industry documents and interviews with
industry participants on the correct contours of
the relevant product market, FTC staff
analyzed scanner data to address whether
Bisquick competed with pancake mixes.
Demand estimation revealed significant cross-
price elasticities of demand between Bisquick
and most of the individual pancake mix
brands, suggesting that Bisquick competed in
the same relevant market as pancake mixes.
Merger simulation based on the elasticities
calculated from the scanner data showed that
if General Mills acquired Pillsbury it likely
would unilaterally raise prices. All of the
evidence taken together further confirmed that
Pillsbury’s Hungry Jack and Bisquick were
significant substitutes, and the staff concluded
that the relevant market i n c l u d e d b o t h p a n c a k e
mixes and Bisquick. The parties resolved the
competitive concerns in this market by selling
Pillsbury’s baking product line. No
Commission action was taken.
Interstate Bakeries–Continental (DOJ 1995)
The Department challenged Interstate Bakeries
Corp.’s purchase of Continental Baking Co.
from Ralston Purina Co. on the basis of likely
unilateral effects in the sale of white pan bread.
Econometric analysis determined that there
were substantial cross-elasticities of demand
between the Continental and Interstate brands
of white pan bread. The Department used the
estimated cross-elasticities in a merger
simulation, which predicted that the merger
was likely to result in price increases for those
brands of 5–10%. The data used to estimate
these elasticities also were used to estimate the
elasticity of demand for white pan bread in the
aggregate and for just “premium” brands of
white pan bread. The latter estimation
indicated that the relevant market was no
broader than all white pan bread, despite some
limited competition from other bread products
and other sources of carbohydrates. The
Department’s challenge to the proposed
merger was settled by a consent decree
requiring divestiture of brands and related
assets in the five metropolitan areas.
14

Integrated Analysis Takes into
Account that Defined Market
Boundaries Are Not Necessarily
Precise or Rigid
For mergers involving relatively homogeneous
products and distinct, identifiable geographic
areas, with no substitute products or locations just
outside the market boundaries, market definition
is likely to be relatively easy and uncontroversial.
The boundaries of a market are less clear-cut in
merger cases that

involve products or geographic
areas for which substitutes exist along a
continuum. The simple dichotomy of “in the
market” or “out of the market” may not
adequately capture the competitive interaction
either of particularly close substitutes or of
relatively distant substitutes.
Even when no readily apparent gap exists in
the chain of substitutes, drawing a market
boundary within the chain may be entirely
appropriate when

a hypothetical monopolist over
just

a

segment of the chain of substitutes would
raise prices

significantly. Whenever the Agencies
draw such a boundary, they recognize and
account for

the fact that an increase in prices
within just that segment could cause significant
sales to be lost to products or geographic areas
outside the segment. Although these lost sales
may be insufficient

to deter a hypothetical
monopolist from raising price significantly,
combined with other factors, they may be
sufficient to make anticompetitive effects an
unlikely result of the merger.
Significance of Concentration
and Market Share Statistics
Section 2 of the Guidelines explains that
“market share and concentration data provide
only the starting point for analyzing the
competitive impact of a merger.” Indeed, the
Agencies do not make enforcement decisions
solely on the basis of market shares and
concentration, but both measures nevertheless
play an important role in the analysis. A merger
in an industry in which all participants have low
shares—especially low shares in all plausible
relevant markets—usually requires no significant
investigation, because experience shows that such
mergers normally pose no real threat to lessen
competition substantially. For example, if the
merging parties are small producers of a
homoge
neous product, operating in a geographic
area where many other producers of the same
homogeneous product also are located, the
Agencies may conclude that the merger likely
raises no competition concerns without ever
determining the precise contours of the market.
By contrast, mergers occurring in industries
characterized by high shares in at least one
plausible relevant market usually require
additional analysis and

consideration of factors in
addition to market share.
Section 1.51 of the Guidelines sets

out the
general standards, based on market shares and
concentration,

that the Agencies use to

determine
whether a proposed merger ordinarily

requires
further analysis. The Agencies use the
Herfindahl-Hirschman Index (“HHI”), which is
the sum of the squares of

the market shares of all
market participants, as the measure of market
concentration. In particular, the Agencies rely on
the “change in the HHI,” which is twice the
product of the market shares

of the merging firms,
and the “post-merger HHI,” which is the

HHI
before the

merger plus

the change in the HHI.
Section 1.51

sets out zones defined by the HHI and
the change in the HHI within which mergers
ordinarily will not require additional analysis.
Proposed mergers ordinarily require no further
analysis if (a) the post-merger HHI is

under 1000;
(b) t
he post-merger HHI falls

between 1000 an
d
1800,
and

the change in the HHI is less than
100;
o
r (c) the post-merger HHI is above 1800, and th
e
cha
nge in the HHI is less than 50
.
Th
e Agencies’ joint publication of Merger
Challenges Data, Fiscal Years 1999–2003 (issued
December 18, 2003), and the Commission’s
publication of Horizontal Merger Investigation
Data, Fiscal Years 1996–2003 (issued February 2,
2004 and revised August 31, 2004), document that
the Agencies have often

not challenged mergers
involving market shares and concentration that
fall outside the zones set forth in Guidelines
section 1.51. This does not mean that the zones are
not meaningful, but rather that

market shares and
concentration are but a “starting point” for the
analysis, and that many mergers falling outside
these three zones nevertheless, upon full
consideration of the factual and economic
evidence, are found unlikely substantially to
lessen competition. Application of the Guidelines
as an integrated whole to case-specific facts—not
15

undue emphasis on market share and
concentration statistics—determines whether the
Agency will challenge a particular merger. As
discussed in section 1.521 of the Guidelines,
historical market shares may not reflect a firm’s
future competitive significance.
Boeing–McDonnell Douglas (FTC 1997) The
Boeing Co., the world’s largest producer of
large commercial aircraft with 60% of that
market, proposed to acquire McDonnell
Douglas Corp., which through Douglas
Aircraft had a share of nearly 5% in that
market. Airbus S.A.S. was the only other
significant rival, and obstacles to entry were
exceptionally high. Although McDonnell
Douglas was not a failing firm, staff
determined that McDonnell Douglas’
significance as an independent supplier of
commercial aircraft had deteriorated to the
point that it was no longer a competitive
constraint on the pricing of Boeing and Airbus
for large commercial aircraft. Many
purchasers of aircraft indicated that McDonnell
Douglas’ prospects for future aircraft sales
were close to zero. McDonnell Douglas’
decline in competitive significance stemmed
from the fact that it had not made the
continuing investments in new aircraft
technology necessary to compete successfully
against Boeing and Airbus. Staff’s
investigation failed to turn up any evidence
that this situation could be expected to be
reversed. The Commission closed the
investigation without taking any action.
Indeed, market concentration may be
unimportant under a unilateral effects theory of
competitive harm. As discussed in more detail in
Chapter 2’s discussion of Unilateral Effects, the
question in a unilateral effects analysis is whether
the merged firm likely would exercise market
power absent any coordinated response from rival
market incumbents. The concentration of the
remainder of the market often has little impact on
the answer to that question.
16

2.The Potential Adverse
Competitive Effects of Mergers
Section 2 of the Guidelines identifies two broad
analytical frameworks for assessing whether a
merger between rival firms may substantially
lessen competition: “coordinated interaction” and
“unilateral effects.” A horizontal merger is likely
to lessen competition substantially through
coordinated interaction if it creates a likelihood
that, after the merger, competitors would
coordinate their pricing or other competitive
actions, or would

coordinate

them more
completely or successfully than before the merger.
A merger is likely to lessen competition
substantially through unilateral effects if it creates
a likelihood that the merged firm, without any
coordination with non-merging rivals, would raise
its price or otherwise exercise market power to

a
greater degree than before the merger.
Normally, the likely effects of a merger within
a particular market are best

characterized as either
coordinated or unilateral,

but it is possible to have
both sorts of competitive effects within a single
relevant market. This possibility may be most
likely if the

coordinated and unilateral effects
relate to different

dimensions of competition or
would manifest themselves at different times.
Although these two broad analytical
frameworks provide guidance

on how the
Agencies analyze competitive effects, the
particular labels are not the focus. What matters
is not the label applied to a competitive effects
analysis, but rather whether the analysis is clearly
articulated and grounded in both sound
economics and the facts of the particular case.
These frameworks embrace every competitive
effect of any form of horizontal merger. The
Agencies do not recognize or apply

narrow
readings of the Guidelines that could cause
anticompetitive transactions to fall outside

of, or
fall within

a

perceived gap between, the
coordinated and unilateral effects frameworks.
In evaluating the likely competitive effects of a
proposed merger, the Agencies assess the full
range of qualitative and quantitative evidence
obtained

from the merging parties, their
competitors, their customers, and a variety of
other sources. By carefully evaluating this
evidence, the Agencies gain

an understanding of
the setting in

which the proposed merger would
occur and

how best to analyze competition.

This
understanding draws heavily on the qualitative
evidence from documents and first-hand
observations of the industry by customers and
other market participants. In some cases, this
understanding is enhanced significantly by
quantitative analyses of various sorts. One type of
quantitative analysis is, as

explained in Chapter 1,
the “natural

experiment” in which variation in
market structure (e.g., from past mergers) can be
empirically related to changes in market
performance.
The Agencies examine whatever evidence is
available and apply whatever tools of

economics
would be productive in an effort to

arrive

at the
most reliable assessment of the likely effects of
proposed mergers. Because the facts of merger
investigations commonly are complex, some

bits
of evidence may appear inconsistent with the
Agencies’ ultimate assessments. The Agencies
challenge a merger if the weight of the evidence
establishes a likelihood that the merger would

be
anticompetitive. The type of

evidence that is most
telling varies from one

merger to the next, as do
the most productive tools of economics.
In assessing a merger between rival sellers,

the
Agencies consider whether buyers are likely able
to defeat

any attempts by sellers after the merger
to

exercise market power. Large buyers rarely can
negate the likelihood that

an

otherwise
17

anticompetitive merger between sellers would
harm at least some buyers. Most

markets with
large buyers also have other buyers against which
market power can

be exercised even if some large
buyers could protect themselves. Moreover, even
very large buyers may be unable to thwart the
exercise of market power.
Although they generally focus on the likely
effects of

proposed mergers on prices paid by
consumers, the Agencies also evaluate the effects
of mergers in other dimensions of competition.
The Agencies

may find that a proposed merger
would

be likely to cause significant
anticompetitive effects with respect to innovation
or some other form of non-price rivalry. Such
effects may

occur in addition to, or instead of,
price effects.
The sections that follow

address in greater
detail the Agencies’ application of the Guidelines’
coordinated interaction and unilateral effects
frameworks.
Coordinated Interaction
A horizontal merger changes an industry’s
structure by removing a competitor and
combining its assets with those of the acquiring
firm. Such a merger may change the competitive
environment in such a way that the remaining
firms—both the newly merged entity and its
competitors—would engage in some form of
coordination on price, output, capacity, or other
dimensions of

competition. The coordinated
effects section

of the Guidelines addresses this
potential competitive concern. In particular, the
Agencies seek to identify those mergers that are
likely either to increase the likelihood of
coordination among firms in the relevant market
when

no coordination existed prior to the merger,
or to increase the

likelihood that any existing
coordinated interaction among the remaining
firms in the relevant market would

be more
successful, complete, or sustainable.
A merger could reduce competition
substantially through coordinated interaction and
run afoul of section 7 of the Clayton Act without
an agreement or conspiracy within

the meaning of
the Sherman Act. Even

if a merger is likely to
result in coordinated

interaction, or more
successful coordinated interaction, and violates
section 7 of the Clayton Act, that coordination,
depending on the circumstances, may not
constitute a violation

of the Sherman Act. As
section 2.1 of the Guidelines states, coordinated
interaction “includes tacit or express collusion,
and may or may not be lawful in and of itself.”

Most mergers have no material effect on the
potential for

coordination. Some may even

lessen
the likelihood of coordination. To identify those
mergers that enhance the likelihood or
effectiveness of coordination, the Agencies
typically

evaluate whether the industry in which
the merger would occur is one that is conducive to
coordinated behavior by the market participants.
The Agencies also evaluate how the merger
changes the environment to determine whether
the merger would make it more likely that firms
successfully coordinate.
In conducting this analysis, the Agencies
attempt to identify the factors that constrain rivals’
ability to coordinate their actions before the
merger. The Agencies also consider whether the
merger would sufficiently alter competitive
conditions such that the remaining rivals after the
merger would be significantly more likely to
overcome

any pre-existing obstacles

to
coordination.

Thus,

the

Agencies not only assess
whether the market conditions for viable
coordination are present, but also ascertain
specifically whether and how the merger would
affect market conditions to make successful
coordination after the merger significantly more
likely. This analysis includes an assessment of
whether a merger is likely to foster

a set of
common incentives

among remaining rivals, as
well as to foster their ability to coordinate
successfully on price, output, or other dimensions
of competition.
Successful coordination typically requires
rivals (1) to reach terms of coordination that are
profitable to

each of the participants in the
coordinating group, (2) to

have a means to detect
deviations

that would undermine the coordinated
interaction, and (3) to have the ability to punish
deviating firms, so as to restore the coordinated
status quo and diminish the risk of deviations.
Guidelines § 2.1. Punishment may be possible, for
example, through strategic price-cutting to the
deviating rival’s customers, so as effectively to
erase the

rival’s profits from its deviation and
make the

rival less likely to “cheat” again.
Coordination on prices tends to

be easier the more
transparent are rivals’ prices, and coordination
through allocation of customers tends to be

easier
18

the more transparent are the identities of
particular customers’ suppliers. It may be
relatively more difficult for firms to

coordinate on
multiple dimensions of competition in markets
with complex product characteristics or terms of
trade. Such complexity, however, may not affect
the ability to coordinate in particular ways, such
as through customer allocation. Under Guidelines
analysis, likely coordination need not be perfect.
To the contrary, the Agencies assess whether, for
example, it is likely that coordinated interaction
will be sufficiently successful following the merger
to result in anticompetitive effects.
L
aFarge–Blue Circle (FTC 2001) A merger of
LaFarge S.A. and Blue Circle Industries PLC
raised coordinated interaction concerns in
several relevant markets, including that for
cement in the Great Lakes region. In that
market, the merger would have created a firm
with a combined market share exceeding 40%
and a market in which the top four firms
would control approximately 90% of the
supply. The post-merger HHI would have
been greater than 3,000, with a change in the
HHI of over 1,000. Cement is widely viewed
as a homogeneous, highly standardized
commodity product over which producers
compete principally on price. Industry
practice was that suppliers informed customers
of price increases months before they were to
take effect, making prices across rival suppliers
relatively transparent.
Sales transactions tended to be frequent,
regular, and relatively small. These factors
heightened concern that, after the merger,
incumbents were not only likely to coordinate
profitably on price terms, but also that the
firms would have little incentive to deviate
from the consensus price. That possibility
existed because the profit to be gained from
deviation would be less than the potential
losses that would result if rivals retaliated. The
Commission challenged the merger, resolving
it by a consent order that required, among
other things, divestiture of cement-related
assets in the Great Lakes region.
R.J. Reynolds–British American (FTC 2004) I n
a merger of the second- and third-largest
marketers of cigarettes, R.J. Reynolds Tobacco
Holdings, Inc. proposed to acquire Brown &
Williamson Tobacco Corporation from British
American Tobacco plc. Within the market for
all cigarettes, the merger would have increased
the HHI

from 2,735 to 3,113. The Commission
assessed whether the cigarette market was
susceptible to coordinated interaction.
Concluding that “the market for cigarettes is
subject to many complexities, continual
changes, and uncertainties that would severely
complicate the tasks of reaching and
monitoring a consensus,” the Commission
closed the investigation without

challenging
the merger. The Commission’s closing
statement points to the high degree of
differentiation among cigarette brands, as

well
as sizable variation in firm

sizes, product
portfolios, and market positions

among the
manufacturers as factors that created different
incentives for the different manufacturers to
participate in future coordination. These
factors made future coordination more difficult
to manage and therefore unlikely.
Both RJR and Brown & Williamson had
portfolios of cigarette brands that included a
smaller

proportion of strong premium brands
and a larger proportion of vulnerable and
declining discount brands than the other major
cigarette competitors. At the time of the
merger, both companies were investing in
growing a smaller number of

premium equity
brands to maintain sales and market share.
There was uncertainty about the results of
these strategic changes. The Commission
concluded that uncertainties of these types
greatly increased the difficulty of engaging in
coordinated behavior. The Commission also
noted that competition in the market was
driven by discount brands

and by equity
investment in select premium brands among
the four leading rivals, and there was little
evidence that Brown & Williamson’s continued
autonomy was critical to the preservation of
either form of competition. Brown &
Williamson had been reducing, not increasing,
its commitment in the discount segment, and
was a very small factor in equity brands.
The Commission also described variations
in the marketing environment for cigarettes
from state to state and between

rural and
urban areas. These variations made it more
difficult and costly for firms to monitor their
rival’s activities and added to the complexity
of coordination.
19

Coordination that reduces competition and
consumer welfare could be accomplished using
many alternative mechanisms. Coordinated
interaction can occur on one or more competitive
dimensions, such

as price, output, capacity,
customers served, territories served, and new
product introduction.

Coordination on price and
coordination on output are essentially equivalent
in their effects. When rivals successfully
coordinate to restrict output, price rises. Similarly,
when rivals successfully coordinate on price—that
is, they maintain price above the level it would be
absent the coordination—the rate of output
declines because consumers buy fewer units.
Coordination on either price or output may
pose difficulties that can be avoided by
coordinating on customers or territories served.
Rivals may coordinate on the specific customers
with

which each does business, or on the general
types of

customers with which they seek to do
business. They also may coordinate on the
particular

geographic areas in which they operate
or concentrate their efforts. Coordination also can
occur with respect to aspects of rivalry, such as
new product introduction. Rivals are likely to
adopt the form of coordination for which it

is
easiest to

spot

deviations from the agreed terms of
coordination and easiest to punish firms that
deviate from those terms.

Industry-specific factors
thus are likely to influence firms’ choices on how
to coordinate their activities.
Concentration
The number of rival firms remaining after a
merger, their

market shares, and market
concentration are relevant factors in determining
the effect of a merger

on the likelihood of
coordinated interaction. The presence of many
competitors tends to make it more difficult to
achieve and sustain coordination on competitive
terms and also reduces the incentive to participate
in coordination. Guidelines § 2.0. The Guidelines’
market share and concentration thresholds reflect
this reality.
The Agencies do not automatically conclude
that a merger is likely to lead to coordination
simply because the merger increases concentration
above a certain level or reduces the number of
remaining firms below a certain level. Although
the Agencies recently have challenged mergers
when four or more competitors would hav
e
rem
ained in the market, see, e.g., LaFarge–Blue
Circle, described above, when the evidence does
not show that the merger will change the
likelihood of coordination among the market
participants or of other anticompetitive effects, the
Agencies regularly close merger investigations,
including those involving markets that would
have fewer than four firms.
As discussed

in

Chapter 1, enforcement data
released by the Agencies show that market shares
and concentration alone are not good

predictors

of
enforcement challenges, except at high levels.
Market shares and

concentration nevertheless are
important in the Agencies’ evaluation of the likely
competitive effects of a merger. Investigations

are
almost always closed when concentration levels
are below the thresholds set forth in section

1.51 of
the Guidelines. In addition, the larger the market
shares of the merging firms, and the higher the
market concentration after the merger,

the more
disposed are the Agencies to concluding that
significant anticompetitive effects are likely.
Additional Market Characteristics
Relevant to Competitive Analysis
Section 2.1 of

the Guidelines sets forth several
general market

characteristics that may be
relevant to the analysis of the likelihood

of
coordinated interaction following a merger: “the
availability of

key information concerning market
conditions, transactions and individual
competitors; the extent of firm and product
heterogeneity; pricing or market practices
typically employed by firms in the market; the
characteristics of buyers and sellers; and the
characteristics of typical transactions.” Section
2.11 of the Guidelines states that the ability of
firms to reach terms of coordination “may be
facilitated by product or firm homogeneity and by
existing practices among firms, practices not
necessarily themselves antitrust violations, such as
standardization of pricing or product variables on
which firms could compete.” Further, “[k]ey
information about rival firms and the market may
also facilitate reaching terms of coordination.” Id.
These market characteristics may illuminate
the degree of transparency and complexity in the
competitive environment. The existence or
absence of any particular characteristic (e.g.,
product homogeneity or transparency in prices) in
a relevant market, however, is neither a necessary
20

nor a sufficient basis for the Agencies

to
determine
whether successful coordination is likely following
a

merger. In other words, these factors are

not
simply put on the left or right side of a ledger and
balanced

against one another. Rather, the
Agencies identify the specific factors relevant to
the particular

mechanism for coordination being
assessed and focus on how those factors affect
whether the merger would alter the likelihood

of
successful coordination.
Formica–
International Paper (DOJ 1999)
Formica Corp. and International Paper Co.
were two producers of high-pressure laminates
used to make durable surfaces such as
countertops, work surfaces, doors, and other
interior building products. Formica sought to
acquire the high-pressure laminates business of
International Paper Co. There were just four
competitors in the United States, and the
acquisition of International Paper Co.’s
business would have given Formica and its
largest remaining competitor almost 90% of
total sales between them. The market
appeared to have been performing reasonably
competitively, but the Department was
concerned that two dominant competitors
would coordinate pricing and output after the
acquisition.
One reason for this concern was that the
small competitors remaining after the merger
had relatively high costs and were unable to
expand output significantly, so they would not
have been able to undermine that coordination.
In addition, the Department concluded that
International Paper, with significant excess
capacity, had the ability to undermine
coordination and had done so. The
Department also found that major competitors
had very good information on each others’
pricing and would be able to detect deviations
from coordinated price levels. After the
Department announced its intention to
challenge the merger, the parties abandoned
the deal.
Although coordination may be less likely the
greater the extent of

product heterogeneity,
mergers in markets with differentiated products
nonetheless can facilitate coordination. Although
a merger resulting

in closer portfolio conformity
may prompt more

intense,

head-to-head
competition among rivals that benefits consumers,
an enhanced mutual understanding of the
production and marketing variables that each rival
faces also may result.

Better

mutual
understanding can increase the ability to
coordinate successfully, thus diminishing the
benefits to consumers

that the more intense
competition otherwise would have provided.
Sellers of

differentiated products also may
coordinate in non-price dimensions of competition
by limiting their product portfolios, thereby
limiting the extent of competition between the
products of rival sellers. They also may
coordinate on customers or territories rather than
on prices.
Di
ageo–Vivendi (FTC 2001) The Commission
challenged a merger between Diageo plc and
Vivendi Universal S.A., competitors in the
manufacture and sale of premium rum—a
product that is heterogeneous as to brand
name and the type of rum, e.g., light or gold,
flavored or unflavored—on the grounds,
among others, that the transaction was likely to
lead to coordinated interaction among
premium rum rivals. Diageo, which owned
the Malibu Rum brand with about an 8% share,
was seeking to acquire Seagram’s, which
marketed Captain Morgan Original Spiced
Rum and Captain Morgan Parrot Bay Rum
brands and had about a 33% share. Bacardi
USA, with its Bacardi Light and Bacardi Limon
brands, was the largest competitor with about
a 54% share. Thus, after the acquisition,
Diageo and Bacardi USA would have had a
combined share of about 95% in the U.S.
premium rum market.
Significant differentiation among major
brands of rum reduces the closeness of
substitution among them. Nonetheless, the
Commission had reason to believe that the
acquisition would increase the likelihood and
extent of coordinated interaction to raise
prices. Having a single owner of both the
Seagram’s rum products and the Malibu brand
created the substantial concern that coordin-
ation that was not profitable for Bacardi and
Seagram’s before the merger likely would have
become profitable after the merger. Although
a smaller rival before the merger, Diageo’s
Malibu imposed a significant competitive
constraint on Seagram’s and Bacardi. The
Commission challenged the merger and agreed
21

to a
settlement with the parties that required
Diageo to divest its worldwide Malibu rum
business to a third party.
Role of Evidence of Past Coordination
Facts showing that rivals in the relevant market
have coordinated in the past are probative of
whether a market is conducive to coordination.
Guidelines § 2.1. Such facts are probative because
they demonstrate the feasibility of coordination
under past market conditions. Other things being
equal, the removal of a firm

via merger, in a
market in which incumbents already have
engaged in coordinated

behavior, generally raises
the risk that future coordination would be more
successful, durable, or complete. Accordingly, the
Agencies investigate whether the relevant market
at issue has experienced such behavior and, if so,
whether market conditions that existed when the
coordination took place—and thus were
conducive to coordination—are still in place. A
past history of coordination found unlawful can
provide strong

evidence of the potential for
coordination after a merger.
Ai
r Products–L’Air Liquide (FTC 2000) Two of
the four largest industrial gas suppliers, Air
Products and Chemicals, Inc. and L’Air
Liquide S.A., proposed acquisitions that would
result in splitting between them the assets of a
third large rival, The BOC Group plc. The
proposed asset split would have resulted in
three remaining industrial gas suppliers that
were nearly the same in size, cost structure,
and geographic service areas. Products
involved in the asset split included bulk liquid
oxygen, bulk liquid nitrogen, and bulk liquid
argon (together referred to as atmospheric
gases), various electronic specialty gases, and
helium—each of which is a homogeneous
product. Bulk liquid oxygen and nitrogen
trade in regional markets, and the transactions
would have affected multiple regional areas.
In these areas, the four largest producers
accounted for between 70% and 100% of the
markets. The four suppliers also accounted for
about 90% of the national market for bulk
liquid argon.
The staff found evidence of past
coordination. In 1991, the four major industrial
air gas suppliers pled guilty in Canada to a
charge of conspiring to eliminate competition
for a

wide range of industrial gases, including
bulk liquid oxygen, nitrogen, and argon.
Industrial gas technology is well-established,
market institutions in the U.S. were similar to
those in Canada, and nothing had changed
significantly during the intervening period to
suggest that coordination had become more
difficult or less likely.
Other evidence also

indicated that the
markets were susceptible to coordinated
behavior: firms announced price changes
publicly, and industry-wide price increases
tended to follow such announcements; a
number of joint ventures, swap agreements,
and other relationships among the suppliers
provided

opportunities for information
sharing; and incumbents tended not to

bid
aggressively for rivals’ current customers.
Neither fringe expansion nor new

entry was
likely to defeat future coordination. Staff
concluded that the proposed asset split would
likely enable the remaining firms to engage in
coordination

more effectively. The parties
abandoned the proposed transactions.
Sui
za–Broughton (DOJ 1999) Suiza Foods
Corp. and Broughton Foods Co. proposed to
merge. Broughton owned the Southern Belle
dairy in Somerset, Kentucky, and Suiza
operated several dairies in Kentucky, including
the Flav-O-Rich dairy in London, Kentucky.
Six years earlier, when Flav-O-Rich and
Southern Belle were independently owned,
both pleaded guilty to criminal charges of
rigging bids in the sale of milk to schools. The
Department found that the proposed merger
would have reduced from three to two the
number of dairies competing to supply milk to
thirty-two school districts in South Central
Kentucky, including many that had been
victimized by the prior bid rigging. The
Department challenged the merger on the
basis that it likely would lead to coordinated
anticompetitive effects, and the demonstrated
ability of these particular dairies to coordinate
was a significant factor in the Department’s
decision. The Department’s complaint was
resolved by a consent decree requiring
divestiture of the Southern Belle Dairy.
Degussa–DuPont (FTC 1998) Degussa
Aktiengesellschaft, a producer of hydrogen
peroxide, proposed to acquire rival E.I. du
22

Pont de

Nemours & Co.’s hydrogen peroxide
manufacturing assets. The Commission found
that the relevant U.S. market was conducive to
coordinated interaction based on evidence that
showed, among other

things,

high
concentration levels,

product homogeneity,
and the ready availability of reliable
competitive information. Moreover, the same
firms that would have been the leading U.S.
producers after the merger had

recently been
found to have

engaged in market division in
Europe for several years. The Commission
identified this history of collusion

as a factor
supporting its conclusion that the proposed
transaction likely would

result

in
anticompetitive effects from coordinated
interaction. Under the terms of a consent
agreement to resolve these competitive
concerns, the acquirer was permitted to
purchase one plant but not

the

entirety of the
seller’s hydrogen peroxide manufacturing
assets.
Even when firms have no prior record of
antitrust violations, evidence that

firms have
coordinated

at least partially on competitive terms
suggests that market characteristics are conducive
to coordination.
Rhodi
a–Albright & Wilson (FTC 2000) R h o d i a
entered into an agreement to acquire Albright
& Wilson PLC, a wholly owned subsidiary of
Donau Chemie AG. The merging firms were
industrial phosphoric acid producers. The
Commission developed evidence that the
market was highly concentrated, that the
relevant product was homogenous, and that
timely competitive intelligence was readily
available—all conditions that are generally
conducive to coordination. Incumbent
marketing strategies suggested a tendency to
curb aggressive price competition and
suggested a lack of competition.
The Commission found that industrial
phosphoric acid pricing, unlike the pricing of
other similar chemical products, had not
historically responded significantly to changes
in the rate of capacity utilization among
producers. In most chemical product markets,
when capacity utilization declines, prices often
decline as well. In this market, however,
during periods of decline in capacity
utilization among industrial phosphoric acid
producers, prices often remained relatively
stable. All of these factors established that the
relevant market—even before the proposed
merger—was performing in a manner
consistent with coordination. The Commission
entered into a consent order requiring, among
other things, divestiture of phosphoric acid
assets.
When investigating mergers in industries
characterized by

collusive behavior or previous
coordinated interaction, the

Agencies focus on
how the mergers affect the likelihood of successful
coordination in the future. In some instances, a
simple reduction in the number of firms may
increase the likelihood of effective coordinated
interaction. Evidence of past coordination is less
probative if the conduct preceded significant
changes in the competitive environment that made
coordination more difficult or otherwise

less
likely. Such changes might include, for example,
entry, changes in the manufacturing processes of
some competitors, or changes in the characteristics
in the relevant product itself. Events such a s these
may have altered the

incumbents’ incentives or
ability to coordinate successfully.
Although a history of past collusion may be
probative as to whether the market currently is
conducive to coordination, the converse is not
necessarily true, i.e., a lack of evidence of past
coordination does

not

imply that future
coordination is unlikely. When the Agencies
conclude that previous episodes of coordinated
interaction are not probative in the context

of
current market

conditions—or when they find no
evidence that

rivals coordinated in the past—an
important focus of the investigation becomes
whether the merger is likely to cause the relevant
market

to change from one in which coordination
did not occur to one in which such coordination is
likely.
Prem
dor–Masonite (DOJ 2001) Premdor Inc.
sought to acquire (from International Paper
Co.) Masonite Corp., one of two large
producers of “interior molded doorskins,”
which form the front and back of “interior
molded doors.” Interior molded doors provide
much the same appearance as solid wood
doors but at a much lower cost, and Premdor
was the world’s largest producer. Premdor
also held a substantial equity stake in a firm
that supplied some of its doorskins. The vast
23

majority of doorskins,

however, were
produced by Masonite and by

a third party
that

was also Premdor’s only large rival in the
sale of interior molded doors.

The

Department
concluded that the upstream and downstream
markets for interior molded doorskins and
interior molded doors were highly
concentrated and that the proposed acquisition
would have removed significant impediments
to coordination.
The Department found that the most
significant impediment to upstream
coordination was Premdor’s ability, in the
event of

an

upstream

price increase, to expand
production of doorskins, both for its own use
and for sale to other

door producers. The
proposed acquisition, however, would have
eliminated Premdor’s incentive to undermine
upstream coordination. The Department also
found that a significant

impediment to
downstream coordination was Masonite’s
incentive and ability to support output
increases by smaller downstream competitors.
The proposed acquisition, however, would
have eliminated Masonite’s incentive to do so.
Finally, the Department found that the
acquisition would have facilitated coordination
by bringing the cost structures of the principal
competitors into alignment, both upstream and
downstream,

and by making it easier to
monitor departures from any coordination.
The Department’s challenge of the acquisition
was resolved by a consent decree requiring,
among other things, divestiture of a Masonite
manufacturing facility.
Maverick and Capacity Factors in
Coordination
A

merger may make coordination more likely
or more effective when it involves the acquisition
of a firm or

asset

that is competitively unique. In
this regard, section 2.12 of the Guidelines
addresses the acquisition of

“maverick” firms, i.e.,
“firms that have a greater economic incentive to
deviate from the terms of coordination than do
most

of their rivals (e.g., firms

that are unusually
disruptive and competitive influences in the
market).” If the acquired firm is a maverick, its
acquisition may make

coordination more likely
because the nature and intensity of competition
may change significantly as a result of the merger.
In such a case, the Agency’s investigation
examines

whether the acquired firm has behaved
as

a maverick and whether the incentives that

are
expected to guide the merged firm’s

behavior
likely would be different.
Similarly, a merger might

lead

to
anticompetitive coordination if assets that might
constrain coordination are acquired

by one of a
limited number of larger incumbents. For
example, coordination could

result if, prior to the
acquisition, the capacity of fringe firms to expand
output was sufficient to

defeat the larger firms’
attempts to coordinate price, but the acquisition
would shift enough of the fringe capacity to a
major firm (or otherwise eliminate it as a
competitive threat) so that insufficient fringe
capacity would remain to undermine a
coordinated price increase.
Arc
h Coal–Triton (FTC 2004) The Commission
challenged Arch Coal, Inc.’s acquisition of
Triton Coal Co., LLC’s North Rochelle mine in
the Southern Powder River Basin of Wyoming
(“SPRB”). Prior to the acquisition, three large
companies—Arch, Kennecott, and Peabody
(the “Big Three”)—owned a large majority of
SPRB mining capacity. The remaining
capacity, including the North Rochelle mine,
was owned by fringe companies with smaller
market shares. The Commission’s competitive
concern was that, by transferring ownership of
the North Rochelle mine from the fringe to a
member of the Big Three, the acquisition
would significantly reduce the supply elasticity
of the fringe and increase the likelihood of
coordination to reduce Big Three output. As a
result of the reduction in fringe supply
elasticity, a given reduction in output by the
Big Three would be more profitable to each
member of that group after the acquisition than
would have been the case before the
acquisition. Mine operators had, in the past,
announced their future intentions with regard
to production and had publicly encouraged
“production discipline.” The court denied the
Commission’s preliminary injunction request
and, after further investigation, the
Commission decided not to pursue further
administrative litigation.
UPM–MACtac (DOJ 2003) UPM-Kymmene
Oyj sought to acquire (from Bemis Co.)
Morgan Adhesives Co. (“MACtac”). Three
24

firms—MACtac, UPM’s Raflatac,

Inc.
subsidiary, and Avery Dennison Corp.—were
the only large producers of paper pressure-
sensitive labelstock, which is used by
“converters” to make paper self-adhesive
labels for a range of consumer and commercial
applications. The Department found

that the
proposed

acquisition would result in UPM

and
Avery controlling over 70% of sales

in the
relevant market, and in

smaller rivals having
insufficient capacity to undermine a price
increase by UPM and Avery. Prior to the
announcement of its proposed acquisition of
MACtac, UPM and Avery had exchanged
communications about their mutual concerns
regarding intense price competition, and

there
was evidence that they had reached an
understanding to hold the line on further price
cuts. MACtac, however, was not a party to this
understanding, and it had both substantial
excess capacity and the incentive to expand
sales by cutting price.
The Department concluded

that the
proposed acquisition would eliminate the
threat to

coordination from MACtac and that
no other competitor posed such a threat. Also
significant was the fact that UPM

was a

major
input supplier for Avery both because this
relationship created opportunities for
communication between

the two and because
it made possible mutual threats that could be
used to induce or enforce coordination. The
Department, therefore, concluded that Avery
and UPM would be likely to coordinate after
the acquisition and

challenged the transaction
on that basis. After

trial, the district court
enjoined the consummation of the acquisition.
Unilateral Effects
Section 2.2 of the Guidelines states that
“merging firms may find it profitable to alter their
behavior unilaterally following the acquisition by
elevating price and suppressing output.” The
manner in which a horizontal merger may
generate

unilateral competitive effects is
straightforward:

By eliminating competition
between the merging firms,

a

merger gives the
merged firm incentives different from

those of

the
merging firms. The simplest unilateral effect
arises

from merger to

monopoly, which eliminates
all competition in the relevant market. Since the
issuance of the Guidelines in 1992, a substantial
proportion of the Agencies’ merger challenges
have been predicated at least in part on a
conclusion that

the proposed mergers were likely
to generate anticompetitive unilateral effects.
Section 2.2 of the Guidelines explains:
“Unilateral competitive

effects can arise in a
variety of different settings. In each setting,
particular other factors describing the relevant
market affect the likelihood of unilateral
competitive effects. The settings differ by the
primary characteristics that

distinguish firms and
shape the nature of their competition.” Section 2.2
does not articulate, much less

detail, every
particular unilateral effects analysis the Agencies
may apply.
The Agencies’ analysis of unilateral
competitive effects draws on many models
developed by

economists. The simplest is the
model of monopoly, which applies to a merger
involving the only two competitors in the relevant
market. One step removed from

monopoly is the
dominant firm model.

That model posits that all
competitors but one in an industry act as a
“competitive fringe,”

which can economically
satisfy only

part of total market demand. The
remaining competitor acts as a monopolist with
respect to the portion of total industry

demand
that the competitive fringe does not elect to
supply. This model might apply, for example, in
a homogeneous product industry in which the
fringe competitors are unable to expand output
significantly.
In other models, two or more competitors
interact strategically. These

models differ with
respect to how competitors interact. In the
Bertrand model, for example, competitors interact
in the choice of the prices they charge. Similar to
the Bertrand

model are auction models, in which
firms interact by bidding. There are many auction
models

with many different bidding procedures.
In the Cournot model, competitors interact in the
choice of the quantities they sell. And in
bargaining models, competitors interact through
their choices of terms on which they will deal with
their customers.
Formal economic modeling can be useful in
interpreting the available data (even with natural
experiments). One type of modeling the Agencies
use is “merger simulation,” which “calibrates” a
model to match quantitative aspects (e.g., demand
25

elasticities) of the industry in which the merger
occurs and uses the calibrated model to predict the
outcome of the competitive process after the
merger. Merger simulation can be a useful tool

in
determining whether unilateral effects are likely to
constitute a substantial lessening of competition
when a particular model mentioned above fits the
facts of the industry under review and suitable
data

can be found to calibrate the model. The

fit
of a model is evaluated on the basis of the totality
of the evidence.
Section 2.2 of

the Guidelines does not establish
a special safe harbor applicable to the Agencies’
consideration of possible unilateral effects.
Section 2.2.1 provides that significant unilateral
effects are likely with differentiated products
when the combined

market share of the merging
firms

exceeds

35% and other market
characteristics indicate that market share is a
reasonable proxy for the relative appeal of the
merging products as second choices as well as first
choices. Section 2.2.2 provides that significant
unilateral effects are likely with undifferentiated
products

when the combined market share of the
merging firms exceeds

35% and other market
characteristics indicate that non-merging firms
would not expand output sufficiently to frustrate
an effort to reduce total market output.
As an empirical matter, the unilateral effects
challenges made by the Agencies nearly always
have involved combined

shares greater than

35%.
Nevertheless, the Agencies may challenge mergers
when the combined share falls below 35% if the
analysis of the

mergers’ particular unilateral
competitive

effects indicates that they would be
likely

substantially to lessen competition.
Combined shares less than 35% may be
sufficiently high to produce a substantial
unilateral anticompetitive effect if the products are
differentiated and the merging

products are
especially close substitutes or

if

the product is
undifferentiated and the non-merging firms are
capacity constrained.
Unilateral Effects from
Merger to Monopoly
The

Agencies are likely to challenge a
proposed merger of the only two firms in a
relevant market. The case against such

a merger
would rest upon the simplest of

all

unilateral
effects models. Relatively few mergers to
monopoly are

proposed.

Some proposed mergers
affecting many markets would have resulted in
monopolies in one or more of these markets.
Frankl
in Electric–United Dominion (DOJ
2000) Subsidiaries of Franklin Electric Co. and
United Dominion Industries were the only two
domestic producers of submersible turbine
pumps used for pumping gasoline from
underground storage tanks at retail stations.
The parent companies entered into a joint
venture agreement that would have combined
those subsidiaries. The Department found that
entry was difficult and that other pumps,
including foreign-produced pumps, were not
good substitutes. Hence, the Department
concluded that the formation of the joint
venture likely would create a monopoly and
thus give rise to a significant unilateral
anticompetitive effect. After trial, the district
court granted the Department’s motion for a
permanent injunction.
Glaxo Wellcome–SmithKline Beecham (FTC
2000) When Glaxo Wellcome plc and
SmithKline Beecham plc proposed to merge,
each manufactured and marketed numerous
pharmaceutical products. For most products,
the transaction raised no significant
competition issues, but it did raise concerns in
several product lines. Among them was the
market for research, development,
manufacture, and sale of second generation
oral and intravenous antiviral drugs used in
the treatment of herpes. Glaxo Wellcome’s
Valtrex and SmithKline Beecham’s Famvir
were the only such drugs sold in the United
States. Having concern both for the market for
currently approved drugs and the market for
new competing drugs, the Commission alleged
that the merger would have prompted a
unilateral increase in prices and reduction in
innovation in this monopolized market. The
matter was resolved by a consent order,
pursuant to which the merged firm was
required, among other things, to divest
SmithKline’s Famvir-related assets.
Suiza–Broughton (DOJ 1999) Suiza Foods
Corp. and Broughton Foods Co. competed in
the sale of milk to school districts, which
procured the milk through annual contracts
entered into after taking bids. The Department
found that competition for each of the school
26

districts was entirely separate from the others,
so each constituted a separate geographic
market. The Department sought to enjoin the
proposed merger of the two companies after
finding that it threatened competition in 55
school districts in south central Kentucky and
would have created a monopoly in 23 of those
districts. The matter was resolved by a consent
order, pursuant to which the merged firm was
required to divest the dairy in Kentucky
owned by Broughton.
Unilateral Effects Relating to
Capacity and Output for
Homogeneous Products
In markets for homogeneous products, the
Agencies consider whether proposed mergers
would, once consummated, likely provide the
incentive to restrict capacity or output
significantly and thereby drive up prices.
Georgia-Pacific–Fort James (DOJ 2000)
Georgia-Pacific Corp. and Fort James Corp.
were the two largest producers in the United
States of “away-from-home” tissue products
(i.e., paper napkins, towels, and toilet tissue
used in commercial establishments). These
products are produced in a two-stage process,
the first stage of which is the production of
massive parent rolls, which also are used to
make at-home tissue products. Georgia-
Pacific’s proposed acquisition of Fort James
would have increased Georgia-Pacific’s share
of North American parent roll capacity to 36%.
Investigation revealed that the industry was
operating at nearly full capacity, that capacity
could not be quickly expanded, and that
demand was relatively inelastic. These factors
combined to create a danger that, after the
merger, Georgia-Pacific would act as a
dominant firm by restricting production of
parent rolls and thereby forcing up prices for
away-from-home tissue products. Merger
simulation indicated that the acquisition would
cause a significant price increase. The
Department’s challenge to the acquisition was
settled by a consent decree requiring the
divestiture of Georgia-Pacific’s away-from-
home tissue business.
Unilateral Effects Relating to the
Pricing of Differentiated Products
In analyzing a merger of two producers of
differentiated consumer products, the Agencies
examine whether the merger will alter the merged
firm’s incentives in a way that leads to higher
prices. The seller of a differentiated consumer
product raises price above marginal cost to the
point at which the profit gain from higher prices is
balanced by the loss in sales. Merging two sellers
of competing differentiated products may create
an incentive for the merged firm to increase the
price of either or both products because some of
the sales lost as a result of the increase in the price
of either of the two products would be
“recaptured” by the other.
As section 2.21 of the Guidelines explains, what
matters in determining the unilateral effect of a
differentiated products merger is whether “a
significant share of sales in the market [is]
accounted for by consumers who regard the
products of the merging firms as their first and
second choices.” Consumers typically differ
widely with respect to both their most preferred
products and their second choices. If a significant
share of consumers view the products combined
by the merger as their first and second choices, the
merger may result in a significant unilateral effect.
In all merger cases, the Agencies focus on the
particular competitive relationship between the
merging firms, and for mergers involving
differentiated products, the “diversion ratios”
between products combined by the merger are of
particular importance. An increase in the price of
a differentiated product causes a decrease in

the
quantity sold for that product and an increase in
the quantities sold of products to which
consumers switch. The diversion ratio from one
product to another

is the proportion of the
decrease in the quantity of the first product
purchased resulting from a small increase in its
price that is accounted

for by the increase in
quantity purchased for the other product. In
general, for any two products brought under
common control by a transaction, the

higher the
diversion ratios, the more likely is significant harm
to competition.
A merger may produce significant unilateral
effects even though a large majority of the
substitution away from each merging product
goes to non-merging

products. The products of
27

the merging firms need only be sufficiently close
to

each other (that is, have sufficiently high
diversion ratios)

that recapturing the portion of
the lost sales indicated by the diversion ratios
provides a significant incentive to raise prices.
Significant unilateral effects are unlikely if the
diversion ratios between pairs of products brought
together by a merger are sufficiently low.
A merger may produce significant unilateral
effects

even though a non-merging product is the
“closest” substitute

for every merging product in
the sense that the largest diversion ratio for every
product of the merged firm is to a non-merging
firm’s product.

The unilateral effects of a merger
of differentiated consumer products are largely
determined by the diversion ratios between pairs
of products combined

by the merger, and the
diversion ratios between

those products and the
products of non-merging firms have at most a
secondary effect.
In ascertaining the competitive relationships in
mergers involving differentiated products, the
Agencies look to

both qualitative and quantitative
evidence

bearing on the intensity or nature of
competition. The Agencies make use of any
available data that can shed light on diversion
ratios, and when possible estimate them using
statistical methods. Often, however, the available
data are insufficient for reliable estimation of the
diversion ratios. The absence of data suitable for
such estimation does not preclude

a

challenge to
a merger. The Agencies also rely on traditional
sources

of evidence, including documentary and
testimonial evidence from market participants.
Even when the Agencies estimate diversion ratios,
documentary and testimonial evidence

typically
are used to corroborate the estimates.
G
eneral Electric–Agfa NDT (FTC 2003)
General Electric Co. proposed to acquire Agfa
NDT Inc. from Agfa-Gevaert N.V. Through
their subsidiaries, the firms were the two
largest suppliers of ultrasonic non-destructive
testing (“NDT”) equipment in the United
States. NDT equipment is used to inspect the
structure and tolerance of materials without
damaging them or impairing their future
usefulness. Manufacturers and end users in a
variety of industries use ultrasonic NDT
equipment for quality control and safety
purposes. Unilateral concerns arose in three
relevant product markets: portable flaw
detectors, corrosion thickness gauges, and
precision thickness gauges. In each of these
markets, the merging parties were the two
largest firms, and the combined firm would
have had a market share of greater than 70% in
each of the markets. Documents and
testimonial evidence indicated that the rivalry
between GE and Agfa was particularly close,
and that, for a wide variety of industry
participants, the products of the two firms
were their first and second choices. The
evidence also showed that the two firms
frequently were head-to-head rivals and that
this competition benefitted consumers through
aggressive price competition and innovation.
Evidence also suggested that the remaining
fringe manufacturers would not be able to
constrain a unilateral price increase by the
merged firm. The Commission obtained a
consent order requiring divestiture of GE’s
NDT business.
In many matters involving differentiated
consumer products, the Agencies have analyzed
price and quantity data generated at the point of
sale, particularly by scanners at supermarket
checkouts, to assess the likely effect of the merger
on prices.
Nestle–Dreyer’s (FTC 2003) Nestle Holdings,
Inc., proposed to merge with Dreyer’s Grand
Ice Cream, Inc. The firms were rivals in the
sale of “superpremium ice cream.” Compared
to premium and non-premium ice cream,
superpremium ice cream contains more
butterfat, less air, and more costly ingredients,
and sells at a substantially higher price. Nestle
sold the Haagen-Dazs brand in competition
with the Dreyer’s Dreamery, Godiva, and
Starbucks brands. Together Nestle and
Dreyer’s accounted for about 55% of
superpremium ice cream sales, and Unilever,
through its Ben & Jerry’s brand, accounted for
nearly all of the rest. Commission staff
developed evidence showing that the merger
was likely to result in unilateral
anticompetitive effects, reflecting the close
rivalry between the merging firms. Dreyer’s
recently had expanded on a large scale into
superpremium ice cream production and
increased its share in this relatively mature
market to above 20%. Analysis suggested that,
by expanding, Dreyer’s induced increased
28

competition from incumbent superpremium
firms. Econometric analysis showed that the
diversion ratios between the Nestle and
Dreyer’s superpremium brands were sufficient
to make a significant unilateral price increase
by the merged

firm likely.

The diversion ratios
with Unilever’s superpremium brands also
were high. The analysis implied that the
merged firm would be likely to raise its prices
anticompetitively and that Unilever would also
likely raise its Ben &

Jerry’s prices in the post-
merger environment. The Commission entered
into a consent agreement with the merging
firms requiring divestiture

of two brands and
key distribution assets.
Gen
eral Mills–Pillsbury (FTC 2001) General
Mills, Inc.’s proposed purchase of The
Pillsbury Co. from Diageo plc, involved the
sale of some of the most widely recognized
food products in the United States. Most of the
products involved in the transaction did not
raise antitrust concerns, but there were
overlaps of potential concern in a handful of
product lines, including flour. The Pillsbury
and General Mills (Gold Medal) brands were
the only two national flour brands, and after
the merger General Mills would account for
over half of total U.S. retail flour sales. Private
label sales comprised less than 25% of sales
nationwide, with the balance accounted for by
numerous regional firms. Evidence tended to
indicate that regional brands were not a
significant constraint on General Mills and
Pillsbury. The regional brands generally were
highly differentiated, specialty brands and
were not viewed as close substitutes for the
more commodity-like General Mills and
Pillsbury brands. The degree of constraint
provided by private label brands was mixed,
with some evidence suggesting that private
label brands were a significant constraint but
other evidence suggesting otherwise.
Commission staff used scanner data to
estimate demand elasticities. Because the
strength of private label and regional flour
brands varied across geographic regions, staff
estimated elasticities for groups of markets
defined according to the presence of regional
brands. The cross-price elasticities between
Gold Medal and Pillsbury brands and between
these brands and private label and regional
brands differed across regions. For example,
the results suggested that Gold Medal and
Pillsbury were

the closest substitutes in some
markets, while private label alternatives were
an equally close substitute in other markets.
Some regional brands also were found to be
relatively close substitutes for Gold Medal and
Pillsbury, while others were not. Commission
staff used the estimated elasticities to simulate
the expected price effect from the merger using
the

Bertrand

model. The results suggested that
the merging parties would raise their prices
more than 10% even in markets where private
label and regional brands were estimated to be
equally close substitutes for Gold Medal and
Pillsbury.
Commission staff also examined whether
pricing for flour varied across markets in
relation to the

amount of competition from
private label or other brands.

In particular,
staff compared prices in geographic markets
that were supplied predominantly by Gold
Medal and

private label, with prices in markets
where Pillsbury or another brand was

also
strong. The results indicated that Pillsbury
generally played an important role in
constraining Gold

Medal prices. These results
were consistent with the elasticity

results
discussed above, and both suggested

that the
proposed merger would lead to price increases
for flour. The parties resolved the competitive
concerns in this market by selling Pillsbury’s
product line. No Commission action was
taken.
Ki
mberly-Clark–Scott (DOJ 1995) Kimberly-
Clark Corp. and Scott Paper Co. were two of
the nation’s leading producers of consumer
paper products when they announced their
intention to merge. In facial tissue, Kimberly-
Clark and Scott, together with Procter &
Gamble, accounted for nearly 90% of all sales,
and Kimberly-Clark’s Kleenex brand itself
accounted for over half of sales. By estimating
the relevant demand elasticities using scanner
data, the Department determined that Scott’s
facial tissue products, which were “value”
products (sold at relatively low prices) and
accounted for only 7% of sales, imposed a
significant constraint on Kimberly-Clark’s
prices. Likewise, in baby wipes, in which
Kimberly-Clark and Scott’s brands together
accounted for approximately 56% of sales, the
Department’s analysis indicated that each was
29

the other’s most significant competitive
constraint. Hence, the Department concluded
that acquiring Scott’s facial tissue and baby
wipes businesses likely would give Kimberly-
Clark an incentive to increase prices
significantly for the merging brands. The
Department’s challenge to the proposed
merger was settled by a consent decree
requiring the divestiture of assets relating to
facial tissue and baby wipes.
Interstate Bakeries–Continental (DOJ 1995)
The Department undertook significant analysis
of s
canner data in evaluating Interstate
Bakeries Corp.’s purchase of Continental
Baking Co. from Ralston Purina Co. At the
time, Continental, with its Wonder brand, was
the largest baker of fresh bread in the United
States, and Interstate was the third-largest.
The Department’s

investigation focused on
white pan bread. White pan bread is the
primary sandwich

and toasting bread in the
United States, and market participants

viewed
it as a highly differentiated product. Price
differences were a clear indication of consumer
preference for premium

brands

over
supermarket private label brands; the price of
the premium brands was at least twice the
price of the private label products.
Econometric

evidence confirmed that there
was only limited competitive interaction
between premium and private label brands.
Marketing, econometric, and other evidence
also indicated that

there were significant
preferences among individual

premium
brands. The Department’s investigation
focused on five metropolitan areas (Chicago,
Milwaukee, Central Illinois, Los Angeles, and
San Diego) in which Continental and

Interstate
had the two largest-selling premium brands, or
two of the three largest-selling brands.
Econometric analysis determined that there
were substantial cross-elasticities of demand
between the Continental and Interstate brands
of white pan bread, consistent with a
likelihood of significant unilateral
anticompetitive effects following the merger.
The Department used the estimated cross
elasticities in a Bertrand merger simulation,
which predicted that the merger was likely to
result in price increases of 5–10% for those
brands. The Bertrand model was considered
reliable for several reasons, including that it
accura
tely predicted pre-merger price-cost
margins. In addition, retailers marked up
every wholesale price by the same percentage,
so estimated retail-level demand elasticities
were the same as those at the wholesale level.
The Department concluded that the proposed
acquisition likely would result in significant
price increases for premium white pan bread
in five metropolitan areas. The Department’s
challenge to the proposed merger was settled
by a consent decree requiring divestiture of
brands and related assets in the five
metropolitan areas.
The Agencies challenge only a tiny fraction of
proposed mergers. (In fiscal years 1999–2003, over
14,000 transactions were notified to the Agencies
under HSR; the Agencies collectively challenged
fewer than 200.) The following matters illustrate,
for differentiated consumer products, the sort of
evidence that has formed the basis of decisions not
to challenge particular transactions.
Fortune Brands–Allied Domecq (FTC 2005)
Fortune Brands, Inc., owner of the Knob Creek
brand of bourbon, proposed to acquire Allied
Domecq’s Maker’s Mark brand of bourbon.
Commission staff analyzed whether the
acquisition would create or enhance unilateral
market power for premium bourbon. Staff
analysis of information discovered in the
investigation suggested that several other large
whiskey brands, including bourbons,
competed strongly with Maker’s Mark and
with Knob Creek. Econometric analysis of
retail scanner pricing data indicated
substantial cross-price elasticities among the
several whiskey brands. Using these cross-
price elasticities staff estimated the diversion
ratios involving Maker’s Mark and Knob
Creek. The results showed that, in the event of
a Maker’s Mark price increase, very few of the
sales lost would go to Knob Creek. The
analysis also found no support for the
proposition that Maker’s Mark would receive
a substantial proportion of the substitution
away from Knob Creek in the event of an
increase in the price of the latter. The staff
closed the investigation.
Maybelline–Cosmair (DOJ 1996) Th
e
D
epartment investigated and decided not to
challenge the proposed merger of Maybelline,
30

Inc., a leading U.S. cosmetics company, and
Cosmair, Inc., the U.S. subsidiary of French
cosmetics giant L’Oreal S.A. Maybelline and
L’Oreal were leading brands, and both were
sold almost exclusively through mass-market
outlets. Although the merger involved many
products, the investigation focused largely on
mascara, in which Maybelline had the leading
share among brands sold through mass-market
outlets, and L’Oreal ranked third. They
combined to account for 52% of sales. Some
evidence suggested that the images associated
with the merging brands were quite different,
and demand estimation was employed to
determine whether there was substantial direct
competition between them.
As in many other investigations involving
differentiated consumer products, the
Department relied on weekly data generated
by scanners at the point of retail sale.
Estimated demand elasticities were used to
simulate the effects of the proposed merger
using the Bertrand model. The analysis
indicated that a significant anticompetitive
effect was not likely, and the Department
decided not to challenge the proposed merger.
Although the Agencies

commonly use scanner
data

in analyzing the likely competitive effects of
mergers involving differentiated products, such
data do not exist for many such products. When
scanner data do not exist, if feasible, it may be
useful to conduct a consumer survey.
V
ail Resorts–Ralston Resorts (DOJ 1997) V a i l
Resorts, Inc. and Ralston Resorts, Inc. were the
two largest owner-operators of ski resorts in
Colorado. In 1996, Vail proposed to acquire
three ski areas operated by Ralston, which
would have given Vail control of five ski areas
in the “front range” area west of Denver,
accounting for 38–50% of front range skier-
days. Relying in part on a survey of skiers, the
Department found that the Vail and Ralston
facilities were close, premium-quality
competitors and that skiers were likely to
switch from one to the other on the basis of
small changes in price, whereas consumers
were much less likely to switch to several other
resorts considered to be of lesser quality.
Bertrand merger simulation based on the
survey data suggested the merger likely would
cause a significant increase in lift-ticket prices
at the acquiring firm’s resorts. The
Department therefore challenged the merger.
The merger simulation also indicated that
divestiture of Ralston’s Arapahoe Basin resort
would substantially prevent price increases,
and that remedy was implemented through a
consent decree.
Before challenging a merger involving
differentiated consumer products, the Agencies
consider the possibility of product repositioning
by non-merging firms in accord with section 2.212
of

the Guidelines. Consideration of repositioning
closely parallels the consideration of entry,
discussed below, and also focuses on timeliness,
likelihood, and sufficiency. The Agencies rarely
find evidence that

repositioning would be
sufficient to prevent or reverse what

otherwise
would be significant anticompetitive unilateral
effects from a differentiated products merger.
Repositioning of a differentiated product entails
altering consumers’ perceptions instead of, or in
addition to, altering its physical properties. The
former can be difficult, especially with well-
established brands, and expensive efforts at doing
so

typically pose a significant risk of failure and
thus may not be undertaken.
Unilateral Effects Relating to Auctions
In some markets, buyers conduct formal
auctions to select suppliers and set prices. In such
markets, the Agencies account for the fact that
competition takes place through an auction. To an
extent, the effects of a merger may depend on the
specific auction format employed, and the
Agencies also account for the specific format of the
auction. The basic effects of mergers, however,
may be quite similar in different auction formats.
Procurement through an auction tends to be
simple for a homogeneous industrial product.
Cargill–Akzo Nobel (DOJ 1997) Cargill, Inc.
proposed to acquire the western hemisphere
salt-producing assets of Akzo Nobel, N.V.
Cargill and Akzo Nobel were two of only four
competitors engaged in the production of rock
s a l t u s e d f o r d e - i c i n g p u r p o s e s i n a n a r e a o f t h e
United States centered on the eastern portion
of Lake Erie, and de-icing salt was sold
primarily to government agencies through
formal sealed bid auctions. To gauge the likely
31

unilateral effect of the merger, the Department
conducted an econometric analysis of data on
winning bids in the area of interest and found
that bids had been significantly lower when
there were four bids than when there were
three. Partly on the strength of that evidence,
the Department challenged the merger on the
basis of a likely unilateral price increase, and
the case was settled by a consent decree
requiring divestitures.
Procurement using an auction is also observed
with more complex and customized products.
With customized products, arbitrage between
customers is likely to be infeasible, and

the
Agencies have sometimes found that there was a
separate competition in each auction because
vendors tailored their prices and other terms to
the particular situation of each customer.
C
hicago Bridge–Pitt-Des Moines (FTC 2005)
The Commission issued an administrative
ruling that the consummated acquisition by
Chicago Bridge & Iron Co. of certain assets
from Pitt-Des Moines, Inc., violated section 7 of
the Clayton Act and section 5 of the FTC Act.
The companies designed, engineered, and built
storage tanks for liquified natural gas (“LNG”),
liquified petroleum gas (“LPG”), and liquid
atmospheric gases such as nitrogen, oxygen,
and argon (“LIN/LOX”); they also designed,
engineered, and built thermal vacuum
chambers (“TVC”). It was uncontested that
each of these “field-erected” products was a
distinct relevant market. The Commission
found that, in all four markets, respondents
were each other’s closest pre-acquisition rival
and that together they largely had dominated
sales since 1990. Field-erected tanks for LNG,
LPG, and LIN/LOX, and TVCs are custom-
made to suit each purchaser’s needs, and
customers place great emphasis upon a
supplier’s reputation for quality and service.
For each of the relevant products,
customers generally seek competitive bids
from several suppliers. Customers in the tank
markets use a second round of bidding to
negotiate price, and sometimes inform bidders
of the existence of competition to reduce the
prices that are bid. TVC customers select one
bidder with which to negotiate a best and final
offer, or they negotiate such offers from
multiple bidders. Chicago Bridge exerted
substantial competitive pressure on Pitt-Des
Moines, and vice-versa. The companies closely
monitored each other’s activities, and
customers frequently were able to play one
firm against the other in order to obtain lower
prices.

Although other firms sometimes were
awarded bids, the

Commission found that
most pre-merger competition was between
Chicago Bridge and Pitt-Des Moines.
The bidding evidence also showed that the
markets were not characterized by easy entry
and expansion and that Chicago Bridge and
Pitt-Des Moines would have continued to
dominate the competition for years. The
Commission considered specific instances of
bidding by entrants into the relevant markets
but concluded that these instances of bidding
did not demonstrate that the entrants would be
able to gain enough market share

to

affect
prices and provide sufficient competition to
replace the competition that was lost through
the merger. In

most instances, entrants’ bids
were rejected because the entrants lacked
requisite reputation and experience.

To
remedy the transaction’s anticompetitive
effects, the Commission ordered Chicago
Bridge, among other

things, to reorganize its
business into two stand-alone divisions, and
divest one of them.
Metso Oyj
–Svedala (FTC 2001) In a merger
involving producers of rock-crushing
equipment, Metso Oyj proposed acquiring
Svedala Industri AB. Rock-crushing
equipment is used in mining and aggregate
production to make small rocks out of big
rocks. Rock-crushing equipment includes cone
crushers, jaw crushers, primary gyratory
crushers, and grinding mills. Each of these
types of equipment was determined to be a
separate relevant product market. In some of
these markets, Metso and Svedala were the
largest and second largest competitors, and the
combined firm would have had a market share
many times higher than any other competitor.
Competition in these markets was analyzed in
an auction model. Metso and Svedala
regularly bid against each other for rock-
crushing equipment sales in each of the
relevant markets. By eliminating competition
between these two leading suppliers, the
proposed acquisition would have allowed
Metso to raise prices unilaterally for certain
32

bids and to reduce innovation. The
Commission resolved the competitive concerns
by requiring divestitures in the relevant
markets of concern.
Ingersoll-Dresser–Flowserve (DOJ 2001)
Flowserve Corp. proposed to acquire Ingersoll-
Dresser Pump Co. These companies were two
of the largest U.S. manufacturers of
specialized, highly engineered pumps used in
oil refining (“API 610 pumps”) and electrical
generation facilities (“power plant pumps”),
and only two other suppliers competed to sell
these pumps in the United States. These
pumps are procured through formal sealed-bid
auctions and then manufactured to meet the
buyers’ specifications. The Department found
that each of these auctions was an entirely
separate competition, and therefore each
constituted a distinct relevant market. The
Department also found that there were only
four competitors in these markets and
concluded that the merger likely would cause
the remaining competitors unilaterally to
increase their bids significantly. Each
competitor would realize that eliminating a
bidder in these auctions would increase the
probability of winning the auction associated
with any given bid. The Department’s
challenge to the acquisition was settled by a
consent decree requiring divestiture of
Flowserve brands as well as manufacturing
and repair facilities.
The procurement

p
rocess for many complex
products tends to be rather involved, and
competition may occur in several distinct stages
with extensive discussions between buyer and
seller at such stages. The Agencies have often
found that such

competition

could be understood
in terms of an auction model with the
procurement process working much like multiple
rounds of bidding in an oral auction.
Arch Wir
eless–Metrocall (DOJ 2004) The
Department investigated and decided not to
challenge the proposed acquisition of Metrocall
Holdings, Inc. by Arch Wireless, Inc. The two
firms were the two largest providers of paging
services in the United States. The Department
focused on possible unilateral anticompetitive
effects in the sale of one-way paging services to
businesses in many individual metropolitan
areas

w
ithin

the United States. In these areas,
the combined firm would have accounted for
a share of all pager units in service from

less
than 15% to over 80%. Because many paging
customers had switched

to other technologies,
such as cellular or PCS telephony, the
Department focused on the customers least
likely to switch, notably many hospitals and
emergency “first responders.”
The Department observed that the
competition at any

one hospital was separate
from the

competition at any other, and that
each hospital paid a price determined by that
hospital’s particular needs and the local rivalry
among alternative technologies.

This
suggested that competition was best analyzed
as

an

oral auction. The Department

ultimately
concluded that the merger likely would not
substantially lessen competition primarily
because most customers have sufficient
alternatives to Arch and Metrocall. These
alternatives included other paging providers,
self-provision of paging services, and emerging
technologies,

such as wireless local area
networks. Although some customers may not
have sufficient alternatives, the Department
concluded that service providers competing for
their business would not be able to identify
such customers and therefore likely would

act
as if they faced substantial competition.
Quest Diagnost
ics–Unilab (FTC 2003) Quest
Diagnostics, Inc. and Unilab Corp. were the
two leading providers of clinical laboratory
testing services to physician groups in
Northern California, with a combined market
share of approximately 70% (the next largest
competitor had approximately 4%). Delivery
of health care in California was distinguished
by high penetration by managed care
organizations, which often delegated the
financial risk for providing health care services
to physician groups. Independent physician
associations (“IPAs”) in Northern California
that assumed the financial risk for laboratory
services, generally under a capitated
arrangement, constituted a significant category
of purchasers of laboratory services. IPA
arrangements with the laboratories typically
consisted of exclusive or semi-exclusive
contracts, pursuant to which the physician
group paid the laboratory a set amount per
month for each patient affiliated with the pre-
33

paid health plans.
An auction model best represented
competition for these capitated contracts with
the IPAs. Quest and Unilab were the first- and
second-lowest bidders for a substantial portion
of these contracts, and thus the merger was
likely to cause prices to rise to the constraining
level of the next-lowest-price seller. The
Commission resolved by consent agreement its
concern that the merger was likely to result in
anticompetitive effects. Pursuant to the
consent agreement, the Commission ordered,
among other things, that the merged firm
divest assets used to provide clinical laboratory
testing services to physician groups in
Northern California.
Unilateral Effects
Relating to Bargaining
In some markets, individual sellers negotiate
with individual buyers on a transaction-by-
transaction basis to determine prices and other
terms of trade. The merger of competing sellers
in such markets may enhance the ability of the
combined seller to bargain for a more favorable
result. That may be most apt to occur if, before the
merger, the buyer viewed a bargain with either of
the two merging parties as significantly better
than a bargain with any other seller. In that event,
the merger could cause the buyer to be willing to
accept worse terms from the merged seller rather
than to strike no bargain at all. That willingness
normally would cause a bargain to be struck on
terms less favorable for the buyer.
Aspen Technology–Hyprotech (FTC 2004) The
Commission challenged the consummated
acquisition by Aspen Technology, Inc. of
Hyprotech, Ltd. Prior to the acquisition, they
were two of the three significant vendors of
process engineering simulation software. This
software is used in the petroleum, chemical,
and pharmaceutical industries to design new,
and model existing, processes to produce
intermediate and finished products. The
combined firm accounted for between 67% and
82% of various process engineering simulation
software markets, and a single other firm made
virtually all other sales. The Commission’s
complaint alleged that the transaction may
have allowed AspenTech unilaterally to
exercise market power in seven global markets.
The firms’ software offerings were
differentiated in their respective capabilities
and in how well

they met customers’ needs
and equipment. Evidence showed that
AspenTech and Hyprotech were the two
closest competitors on price and on innovation
in

each

of

the markets. Evidence also

showed
that, prior to

the merger, AspenTech and
Hyprotech discounted prices to win or
maintain customers,

and that, due to the
merger, customers would no

longer be able to
obtain a lower price from AspenTech by
threatening to switch to Hyprotech.

The third
firm in the market was declining and
represented a less credible threat for customers
to use in price negotiations. This

suggested
that competition was best

analyzed in a
bargaining framework. Staff concluded that
the

transaction would have allowed
AspenTech to profit by

unilaterally raising
prices and reducing innovation because a
significant portion of the sales that may
otherwise have been lost to the other merging
partner as a consequence of such actions would
be retained because of the acquisition. The
Commission

resolved these competitive
concerns by issuing a consent order requiring
divestiture of certain process engineering
simulation software assets.
The Agencies have used

bargaining theory to
analyze the effects of hospital mergers on the
prices they charge

managed care organizations
(“MCOs”). MCOs market health

care plans in
which subscribers’ health care costs are, in whole
or in part, paid for directly by

the plan or
reimbursed after being paid by the subscriber.
MCOs negotiate with health care providers,
especially hospitals, the charges they or their
subscribers pay. A subscriber’s out-of-pocket
costs of using a particular hospital depends
significantly on whether that subscriber’s plan has
contracted with that hospital and on what terms.
To market a

plan successfully in a given area,
an MCO seeks to contract on favorable terms with
a wide array of hospitals so that the hospitals
preferred by many potential subscribers are
available to them

on

favorable terms. Subscribers
are attracted to a plan by the ability to get

care
from providers they prefer on favorable terms
resulting from the MCO having negotiated
discounts off the providers’ usual rates. The
34

strength of a hospital’s bargaining position with
respect to MCOs is determined in large part by the
proximity of other hospitals offering a similar or
broader package

of services with a similar or
higher perceived quality.

For example, close
head-to-head competition between two hospitals
allows an MCO

credibly to threaten both that it
will contract with, and steer its patients to, only
the other. The elimination of such competition
through a merger, therefore, can enable the
hospitals to negotiate higher prices.
Car
ilion–Centra (FTC 2005) The Commission
investigated a consummated joint venture
between Carilion Health System, the largest
hospital system in southwest Virginia, and
Centra Health, Inc. Carilion owns and
operates two large hospitals in Roanoke,
Virginia, while Centra owns two hospitals in
Lynchburg, Virginia. Prior to the transaction,
Carilion also was the sole owner of a small
community hospital located in Bedford
County, halfway between Roanoke and
Lynchburg, about 30 miles from each city. In
connection with the joint venture transaction,
Carilion sold half of its interest in Bedford to
Centra, so that the two hospital systems each
had a 50% interest in the Bedford facility.
The joint venture partners, Carilion and
Centra, were the two largest hospital
competitors in the Bedford area prior to the
joint venture. Staff examined whether the joint
venture would result in an increase in prices in
Bedford County as a result of reduced
competition between Carilion and Centra to
attract Bedford area patients. Staff found that,
after the creation of the joint venture, the
Bedford hospital negotiated its prices
separately from the Carilion or Centra systems
and that Bedford prices either declined
substantially or remained roughly the same.
Staff closed the investigation.
Slidell Memorial–Tenet (FTC 2003) Tenet
Health Care Systems, which operated
NorthShore Regional Medical Center in Slidell,
Louisiana, proposed to acquire Slidell
Memorial Hospital. The transaction would
have combined the only full-service acute care
hospitals in Slidell. Evidence suggested to
Commission staff that Slidell residents and
their employers demanded health insurance
plans that included either Slidell Memorial or
NorthShore Regional as

network participants,
and

that a nearby small surgical hospital and
cardiac specialty hospital were inadequate
substitutes because they were not full-service
hospitals.
If Tenet purchased Slidell Memorial, health
insurance companies would face the choice
either of meeting Tenet’s price terms, or,
alternatively, excluding both NorthShore
Regional

and Slidell Memorial from their
provider networks. The latter action would
likely make the health plan

far less marketable,
particularly to employers and their employees
who desire access

to a Slidell hospital. In
addition, a health plan that did not include
these hospitals could offer services only from
physicians willing and able to treat the plan’s
patients at

hospitals located outside of Slidell.
Information received from local employers,
residents, and health

insurance plans
suggested to Commission staff that

health
insurance companies would be unlikely to risk
losing NorthShore Regional, Slidell Memorial,
and the physician base of

the hospitals, and
instead likely would agree to a

price increase.
Commission staff set forth its competition
analysis in public comments to the Louisiana
Attorney General, subsequent to which local
citizens,

prior to conclusion of

the
Commission’s investigation, voted to reject the
proposed acquisition. The deal was never
consummated.
Rite Aid–
Revco (FTC 1996) The nation’s two
largest retail drug store chains, Rite Aid Corp.
and Revco D.S., Inc., sought to merge. The
firms competed with each other in many local
markets, including in 15 metropolitan areas in
which the merged firm would have had more
than 35% of the retail pharmacies.
Commission staff analyzed the merger’s effect
on retail sales made through pharmacy benefit
plans. Pharmacy benefit managers (“PBMs”)
contract with multiple pharmacy firms to form
networks offering pharmacy benefits as part of
health insurance coverage. Pharmacy
networks often include a high percentage of
local pharmacies because access to many
participating pharmacies is often important to
plan enrollees.
Rite Aid and Revco each offered a
significant portion of the broad local coverage
35

that payers demanded on behalf of their
enrollees. Marketable networks could be
assembled with just one of the firms
participating. After the merger, a high
proportion of

plan enrollees would have
considered the merged entity to be their most
preferred pharmacy chain, leaving PBMs

with
less attractive options for assembling networks
that did not include the merged firm. The
merged

firm as a result unilaterally could have
demanded

higher dispensing fees as a
condition of participating in a network. The
Commission voted to challenge the transaction,
after which the parties abandoned it.
Mergers can create or enhance

market power
on the part of buyers as well as on

the

part of
sellers. The Agencies, therefore, consider the
possibility that a merger would

produce a
significant anticompetitive effect by eliminating
competition between the merging firms in a
relevant market in which

they compete for an
input. By eliminating an

important alternative for
input suppliers,

a merger can lessen competition
for an input significantly.
Aetna–
Prudential (DOJ 1999) Aetna, Inc.
proposed to acquire assets relating to health
insurance from The Prudential Insurance Co.
of America. The acquisition would have
eliminated head-to-head competition between
Aetna and Prudential in the sale of health
maintenance organization (“HMO”) and
HMO-based point-of-service health plans in
Dallas and Houston. The Department
challenged the proposed acquisition on the
basis of likely anticompetitive effects in the
purchase of physicians services for these two
types of health plans and on the basis of likely
anticompetitive effects in the sale of those
plans. The Department concluded that the
proposed merger would have allowed Aetna to
reduce physician reimbursement rates because
it would have significantly increased the
number of patients enrolled in Aetna health
plans and therefore also the number of patients
a physician would have lost by terminating
participation in Aetna health plans. The
Department’s challenge to the acquisition was
settled by a consent decree requiring, among
other things, the divestiture of interests Aetna
had acquired in two other health plans
operating in Dallas and Houston.
36

3. Entry Analysis
As explained by section 3.0 of the Guidelines,
an anticompetitive merger can create “sales
opportunities available to entrants,” and
consequently a “merger having anticompetitive
effects can attract . . . entry, profitable at
premerger prices, that would not have occurred”
without the merger. In evaluating the competitive
effects

of

a proposed merger, the Agencies
therefore ask whether the merger would attract
entry that “would be timely, likely, and sufficient
in its magnitude, character and scope to deter or
counteract the competitive effects” of the merger,
thereby causing “prices to fall to their premerger
levels or lower.” To address this question, the
Agencies

examine industry conditions to
determine whether a merger is likely

to attract
entry, as well as

whether entry would be likely to
prevent, or to reverse in a timely fashion, any
anticompetitive effects of a merger.
In evaluating the likely competitive effects of a
proposed merger, the Agencies distinguish among
different sorts of firms that potentially would
supply the relevant product in the

event of an
attempt to exercise market power. Section 3 of the
Guidelines addresses “committed entry,” which is
defined as “new competition that requires
expenditure of significant sunk costs.” Costs
associated with entry are “sunk” if they cannot be
recovered by reversing the entry decision. Section
1.32 of the Guidelines addresses “uncommitted
entry,” which refers to supply responses not
incurring significant sunk costs. Uncommitted
entry normally takes the form of incumbent firms
using their existing assets to make products or
perform

services those firms do not currently
make or perform.
The focus of this

chapter is Section 3 of the
Guidelines, which addresses committed entry,
referred to here simply as “entry.” Other sections
of the Guidelines separately consider three specific
types of supply responses to mergers: output
increases by maverick incumbent firms that
potentially would frustrate coordination among
the merged

firm and its rivals (§ 2.12 & n.20);
output increases by

market incumbents with
excess capacity that potentially would frustrate
the unilateral exercise of market power with
undifferentiated products (§ 2.22 & n.24); and
product repositioning by non-merging firms that
potentially would frustrate the unilateral exercise
of market power with differentiated products
(§ 2.212 & n.23). As with entry, the examination

of
these supply responses focuses on the likelihood,
timeliness, and sufficiency of the supply response.
Entry may be considered successful if

the
entrant generates sufficient revenue to cover all
costs apart from the sunk costs of entry. Such
entry succeeds in the sense that the entrant
becomes and remains a viable competitor in the
market. Defined in this way, successful entry into
some markets may require nothing more than the
investment of time and money.

In such a market,
an anticompetitive merger nevertheless will not
attract entry if the sunk cost is so great that the
entry

offers little prospect of a reasonable return
on that investment. Significant sunk costs may be
associated, for example, with building a
manufacturing facility, developing a product,
achieving regulatory

approvals, and gaining
customer acceptance. An anticompetitive merger
also will not attract entry if

the risk of failed entry,
and the associated loss of the entry investment, is
so great that potential rewards do not justify
making that investment. The Agencies therefore
examine the sunk costs and

likely returns
associated with entry.
In other markets, successful entry may not be
possible despite the investment of time and money
because success may depend on factors over
which a potential entrant has little control.

For
example, an anticompetitive merger may not
attract entry because entry is regulated or even
37

legally barred, or because entrants’ efforts would
be stymied by the intellectual property rights of
incumbents or by the unavailability of essential
inputs. An anticompetitive merger also may not
attract entry because entrants would suffer
significant cost disadvantages in competing with
incumbents. This situation

can occur for a variety
of reasons, but tends to be most important when
entrants would be unlikely to achieve the
economies of scale (i.e., reductions in average cost
from operating at a higher rate of output) and
scope (i.e.,

reductions in cost from producing
several products together) already achieved by
incumbents. The Agencies

therefore examine
obstacles to entry and possible cost disadvantages
for entrants.
If a merger does attract entry, that entry still
may be insufficient to deter or fully counteract the
merger’s anticompetitive effect, or the entrant
may take so long to achieve market significance
that the merger nevertheless produces sustained
anticompetitive effects. The Agencies therefore
examine how long entry would take and

how it
likely would affect the merger’s competitive
consequences. The discussion that follows
addresses in more detail the Guidelines’ concepts
of

likelihood, timeliness, and sufficiency of entry.
Likelihood of Entry
The Agencies do not assess merely whether
firms could commit incremental resources to the
relevant market, but more importantly whether
the proposed merger would be likely to induce
firms to do so in a timely fashion and in a
sufficient magnitude to deter or counteract the
merger’s anticompetitive effects. Thus,
information regarding such factors as technical
capability, know-how, sunk costs, and other
requirements for successful entry is necessary, but
not sufficient, for the Agencies’ evaluation of entry
conditions. The Agencies must also determine
whether firms would have an adequate profit
incentive to enter at prices prevailing before the
merger, i.e., the prices to which the market likely
would

return following entry sufficient to deter or
counteract the merger’s anticompetitive effects. In
evaluating the likelihood of entry, the Agencies
thus focus on the sales opportunities created by
the proposed merger.
Sunk Costs and Risks
Associated with Entry
Consumer Products
The Agencies commonly find that proposed
mergers involving highly differentiated consumer
products would not attract the entry of new
brands because entry would not be profitable at
pre-merger prices. In a market populated by well-
established brands, successful entry usually
requires a substantial investment in advertising
and promotional activity over a long period of
time to build share and achieve widespread
distribution through retail channels. Moreover,
making such investments by no means assures
success.
Nestle–Dreyer’s (FTC 2003) Nestle Holdings,
Inc. proposed to merge with Dreyer’s Grand
Ice Cream, Inc. The firms were two of the top
three rivals in the superpremium ice cream
market. Those three combined for 98% of
sales. Grocery retailer private label sales
accounted for the remaining 2%. Evidence
showed entry to be difficult, both because of
the need to develop brand equity to compete
effectively, and the need to obtain effective
distribution, which is difficult in this market
because the product must be maintained at a
particular freezing temperature throughout the
distribution process. The Commission
determined that entry was unlikely to prevent
or reverse the merged firm’s likely unilateral
anticompetitive price increase and challenged
the merger. To resolve the competitive
concerns, the Commission entered into a
consent agreement with the parties requiring
divestiture of two brands.
Staples–Office Depot (FTC 1997) The
Commission successfully challenged a merger
between Staples, Inc. and Office Depot, Inc.,
two of the three national office supply
superstore retail chains. The Commission
found, and the court agreed, that entry was
unlikely to prevent anticompetitive effects
arising from the merger. Important to this
finding was that the three incumbent office
superstores had saturated many of the local
markets such that a new office superstore
entrant would have difficulty in achieving
economies of scale in, among other things,
38

advertising and distribution.
Kimberly-Clark–Scott (DOJ 1995) The
Department found that entry would be
unlikely to be attracted by the proposed
merger of Kimberly-Clark Corp. and Scott
Paper Co., which the Department challenged
on the basis of unilateral anticompetitive
effects in facial tissue and in baby wipes.
Brand recognition was very important for both
products, and the Department concluded that
the costs and risks associated with establishing
new brands likely would prevent the sort of
entry that could prevent or reverse the likely
anticompetitive effects of the merger. The
Department’s challenge to the proposed
merger was settled by a consent decree
requiring the divestiture of assets relating to
facial tissue and baby wipes.
Successful prior entry can provide evidence
that an anticompetitive merger would attract entry
despite the need to make a substantial investment
in advertising and promotional activity.
Successful prior entry, however, is by no means
proof that entry likely would occur following a
proposed merger, or that any such entry would be
sufficient to prevent significant anticompetitive
effects. Evidence of the severity of entry obstacles
sometimes is found in an inability of past entrants
to gain consumer acceptance.
L’Oreal–Carson (DOJ 2000) In considering
L’Oreal’s proposed acquisition of Carson, Inc.,
the Department found that several brands of
hair relaxer kits introduced in recent years had
been unable to generate significant sales. That
evidence reinforced the Department’s
conclusion that the proposed merger would
not attract entry sufficient to deter or
counteract the likely anticompetitive effects of
the merger. The Department’s challenge to the
merger was resolved by a consent decree
requiring the divestiture of relevant brands
and associated assets, including a
manufacturing facility.
Swedish Match–National (FTC 2000) S w e d i s h
Match North America, Inc., proposed to
acquire National Tobacco Company, L.P. The
companies were the first- and third-largest
producers of loose leaf chewing tobacco in the
United States, with shares of 42% and 18%.
Swedish Match’s loose leaf products included
the Red Man premium brands. National
Tobacco produced the Beech-Nut line of
premium brands. The Commission
successfully challenged the merger in district
court, asserting that the transaction would
result in anticompetitive effects in the U.S.
market for loose leaf chewing tobacco. The
evidence showed that entry would be thwarted
by, among other things, the substantial sunk
costs required to overcome strong brand
loyalty. The evidence included prior
unsuccessful efforts at introducing new brands
by established rivals.
Mergers involving differentiated consumer
products also may be unlikely to attract entry
because no customer has an incentive to sponsor
entry. Wholesale customers often are retailers,
and there are circumstances under which retailers
suffer little from wholesale price increases because
they pass the price increases on to final
consumers. Moreover, retailers can benefit from
a merger of manufacturers if the retailers sell
private label products in competition with the
merging manufacturers. A merger involving
differentiated consumer products also is unlikely
to attract entry when its anticompetitive effects
would be felt in just a few local markets or if there
are important local brands catering to local tastes
and traditions.
Interstate Bakeries–Continental (DOJ 1995)
The Department challenged the proposed
purchase of Continental Baking Co. by
Interstate Bakeries Corp. on the basis of anti-
competitive effects in the sale of white pan
bread within five metropolitan areas.
Anticompetitive effects in these five
metropolitan areas would have been unlikely
to attract entry by a national brand because the
overall effect of the merger on national price
would have been insignificant. In each of the
five metropolitan areas, only one of the leading
premium brands was sold nationally, while the
others were regional or strictly local.
Anticompetitive effects in these areas would
have been unlikely to attract local entry
because the sunk costs of brand development
would be spread over relatively few sales and
because important media used for advertising
and promotion cannot be effectively targeted
at limited metropolitan areas. The
Department’s challenge to the proposed
39

merger was settled by a consent decree
requiring divestiture of brands and related
assets in the five metropolitan areas.
Industrial Products
The sources of the sunk costs associated with
entry into markets for industrial products vary
from one market to the next. In many markets, the
only significant sunk costs are those associated
with the construction or acquisition of productive
facilities, such as manufacturing plants. In other
markets, substantial investments are required for
product development and to establish support
organizations for distribution and service. And in
some markets, additional sunk costs are associated
with demonstrating product performance and
reliability to potential customers. The sunk costs
from each of these sources can be large or small.
Mergers of industrial products manufacturers may
be unlikely to attract entry if customers are
unwilling to purchase products without a well-
established record of satisfactory performance. A
merger is especially unlikely to attract entry if
product failure imposes a substantial cost on
customers.
Ingersoll-Dresser–Flowserve (DOJ 2001) The
Department challenged the proposed
acquisition of Ingersoll-Dresser Pump Co. by
Flowserve Corp. on the basis of likely
unilateral anticompetitive effects in markets for
specialized pumps used in oil refining and
electrical generation facilities. The Department
found that the design and testing of an array of
such pumps would entail substantial sunk
costs. The Department also found that an
entrant could not effectively compete in the
relevant markets without incurring additional
sunk costs in the establishment of a network of
service and repair facilities. And because
pump failure could shut down part of a
refinery or electric generation plant, the
Department found that many customers in the
relevant markets would not purchase from a
supplier that had not demonstrated the
reliability and efficiency of its pumps in the
particular use for which the pump was being
sought. This fact added additional sunk entry
costs and extended yet further the substantial
time successful entry would take. The
Department’s challenge to the acquisition was
settled by a consent decree requiring
divestiture of Flowserve brands as well as
manufacturing and repair facilities.
Metso Oyj–Svedala (FTC 2001) The
Commission investigated a proposed merger
between leading manufacturers of mining
equipment, Metso Oyj and Svedala Industri
AB. Both firms made equipment used in
mining, including gyratory crushers, jaw
crushers, cone crushers, and grinding mills.
Operational failure by any of these machines
would require shutting down the entire mining
circuit. Purchasers would deal only with well-
established companies producing equipment
with a proven track record of reliability. A
new entrant would face significant sunk costs
in developing and testing a new piece of
equipment and in gaining customer
acceptance. Although several potential
entrants could manufacture this equipment
within two years, it was unlikely that
customers would purchase new and untested
equipment within this period. The
Commission resolved the competitive concerns
by requiring divestitures in the relevant
markets of concern.
Exxon–Mobil (FTC 1999) Prior to merging,
Exxon Corp. and Mobil Corp. were leading
producers of jet turbine oil. Jet turbine engines
require a specialized lubricant that can operate
in an extreme environment. Failure by the
lubricant could lead to engine failure, requiring
the engine to be taken out of service for an
extended period of time for repairs or
overhaul. This lubricant, although expensive
for a lubricating oil, was inexpensive relative to
the cost of losing use of an engine for any
period of time as well as to the cost of repairing
or replacing an engine. To secure sales to
customers, jet turbine oil producers submitted
their products for extensive product testing,
including testing on the customer’s specific
model engine. After developing a satisfactory
lubricant, therefore, a new entrant would have
to invest substantial sunk costs in product
testing and incur substantial time delay in
entering. The Commission, therefore,
concluded that entry would not eliminate
competitive concerns. The Commission and
the parties entered into a settlement that
required, among other things, divestiture of
Exxon’s jet turbine oil business.
40

Precision Castparts–Wyman-Gordon (FTC
1999) Precision Castparts Corp. and Wyman-
Gordon Co., two leading manufacturers of
titanium, stainless steel, and nickel-based
superalloy cast components for jet engine and
airframe applications, proposed to merge.
Several companies worldwide had the
capability of manufacturing these types of cast
parts, but customers were not likely to
purchase them from companies lacking a
proven, years-long track record of producing
products that did not fail. The Commission
concluded that entry would not be timely,
likely, and sufficient to thwart anticompetitive
effects from the merger. It resolved its
competitive concerns in a consent order that,
among other things, required divestiture of a
titanium foundry and a large cast parts
foundry.
The Agencies have sometimes found that sunk
costs did not pose a significant entry obstacle. In
such cases, expected returns justified any required
investment in new productive facilities, and
successful entry typically did not require the
establishment of a brand or reputation for quality.
ADS–Hancor (FTC 2005) The FTC closed its
investigation into the acquisition by Advanced
Drainage Systems, Inc. of Hancor Holding
Corp. Both firms were major producers of
corrugated high density polyethylene
(“HDPE”) pipe used for underground water
drainage. Staff found that demand for HDPE
was growing, that a new HDPE manufacturing
plant could be constructed at relatively low
cost and could be in operation within a short
period, that several firms had entered de novo
in the prior ten years, and that several fringe
incumbents were expanding output. Also,
existing manufacturers of certain other, non-
HDPE pipes could enter at relatively little sunk
cost. Many of them served common customers
already and thus did not have to establish a
new marketing organization. The Commission
concluded that entry conditions were such that
anticompetitive effects from the merger were
unlikely.
Omnicare–NeighborCare (FTC 2005) The
largest provider of pharmacy services to long-
term care facilities (“LTC pharmacy”),
Omnicare, Inc., offered to acquire a large rival
LTC pharmacy, NeighborCare, Inc. The
combined firm would have under contract
more than half of skilled nursing facility beds
in multiple states, and the post-merger market
structure would be highly concentrated in
many areas. The Commission’s decision not to
challenge the acquisition was based in part on
relatively easy entry conditions in the then-
current marketplace. Sunk costs were
relatively low, illustrated by many historical
examples of entry, including entry by former
employees of incumbent LTC pharmacies,
expansion by retail pharmacies into the LTC
business, and vertical integration by skilled
nursing facility operators.
Wrigley–Kraft (FTC 2005) Wm. Wrigley Jr.
Co. proposed to acquire certain confectionary
assets from Kraft Foods, Inc., including certain
well-known breath mint and chewing gum
brands. Commission staff assessed whether
sunk costs that would have to be incurred in
acquiring the capacity to produce or market
breath mints or chewing gum would pose
significant impediments to post-merger
competitive entry. Staff found that new
entrants would have relatively easy access to
third-party “co-manufacturers” for the
production of the relevant products and
thereby could avoid costly expenditures in
developing manufacturing expertise or in
building a new facility. Entrants also could
competitively distribute their products by
outsourcing those functions to third-parties.
Staff also found evidence of significant recent
branded entry. Based in part on this evidence
concerning entry conditions, staff closed its
investigation.
Playbill–Stagebill (DOJ 2002) In its analysis
of the consummated acquisition of certain
assets of Stagebill Media by Playbill Inc., the
Department found that sunk costs of entry
were insignificant. Prior to the acquisition,
Playbill was the nation’s largest publisher of
theater programs and Stagebill was its largest
competitor in many cities. The Department
found that the merger was not likely to be
anticompetitive because the printing itself
could be out-sourced, so an entrant did not
need to incur significant sunk costs. Indeed,
the Department found that entry based on out-
sourcing had occurred. The Department also
41

found that theaters could contract directly with
printers and some had done so. Finally, the
Department found that prices of theater
programs had not increased. Consequently,
the Department took no action against the
acquisition.
Although many purchasers of differentiated
consumer products are reluctant to switch from
brands they know and trust, purchasers of
industrial commodities may be more likely to
switch and be willing to sponsor entry when they
perceive a lack of competition.
National Oilwell–Varco (DOJ 2005) Entry
considerations were a major factor in the
Department’s decision not to challenge the
acquisition by National Oilwell Inc. of Varco,
Inc. Those firms were among the very few
significant competitors in the sale of various
products and services relating to offshore
drilling for oil and gas, and that fact initially
gave the Department serious concerns about
the competitive effects of the acquisition.
Nevertheless, the Department found that
several major customers for these products and
services believed that they would be able to
sponsor successful entry by committing to
make purchases from firms with little or no
current market presence. The Department also
identified sellers of related products and
services interested in entering.
In some markets, it is clear that a merger
would not attract entry simply because the sunk
costs of entry are far too great in comparison to the
likely rewards.
General Dynamics–Newport News (DOJ 2001)
General Dynamics Corp. proposed to acquire
Newport News Shipbuilding Inc. These were
the only firms that built nuclear submarines for
the U.S. Navy. The manufacture of a nuclear
submarine requires much highly specialized
equipment, personnel, and know-how, all of
which combined to make the sunk cost of entry
extraordinarily high. As a result, the merger
was not likely to attract entry, especially in
view of the fact that an entrant might never
make a single sale. The proposed acquisition
was abandoned after the Department filed suit
to enjoin it.
Other Significant Obstacles to
Successful Entry
Entry may not be attracted by an
anticompetitive merger for many reasons. In some
markets, entry is explicitly regulated, and in
others, government regulation can effectively bar
entry. The Agencies have found legal obstacles to
entry to be significant in some instances.
For example, many states have certificate of
need (“CON”) programs barring entry into health
care markets unless a potential entrant makes an
expensive and time-consuming demonstration
that there is an unmet need for its services.
Regulation of this sort increases sunk costs and the
time it takes to enter, and it also creates a
significant risk that entry ultimately will be
prohibited. For several hospital mergers
challenged by the Agencies, as well as a merger of
outpatient surgical centers, CON regulation was a
factor in the Agencies’ determination that the
mergers would not attract entry.
Mercy Health–Finley (DOJ 1994) The
Department challenged the formation of a
partnership between Mercy Health Services
and Finley Tri-States Health Group, Inc. The
companies owned the only general acute care
hospitals in Dubuque, Iowa, and the
Department concluded that Iowa’s CON
statute would prevent the construction of any
new general acute care hospital in Dubuque.
That no new hospital would be built was
stipulated at trial, but the district court rejected
the Department’s challenge to the merger on
other grounds. The case became moot before
the Department’s appeal could be decided
because the parties abandoned the merger.
Environmental and zoning regulations are
other examples of rules that may make entry
difficult.
Florida Rock–Harper Bros. (DOJ 1999) Florida
Rock Industries, Inc. proposed to acquire
Harper Bros., Inc. These companies competed
in the sale of aggregate and silica sand in
southwest Florida and together accounted for
at least 60% of the sales of each product. The
Department concluded that the acquisition
would be likely to lessen competition
substantially and challenged the acquisition.
The Department found many reasons why the
42

acquisition would not attract entry, including
environmental regulation at the local, state,
and federal levels that made it very difficult to
open a new aggregate or silica sand production
facility in the area. The Department’s
challenge to the merger was resolved by a
consent decree requiring the divestiture of a
quarry and sand mine.
In the telecommunications and pharmaceutical
industries, federal regulation may pose a
significant obstacle to entry. Entry into some
telecommunications markets is constrained by the
need to have a licence from the Federal
Communication Commission for use of part of the
electromagnetic spectrum, while the introduction
of pharmaceuticals requires approval by the Food
and Drug Administration.
Cingular–AT&T Wireless (DOJ 2004) C i n g u l a r
Wireless Corp., a joint venture of SBC
Communications Inc. and BellSouth Corp.,
proposed to acquire AT&T Wireless Services,
Inc. Both Cingular and AT&T Wireless
provided mobile wireless telecommunications
service (“MWTS”) throughout the United
States. The Department concluded that the
acquisition likely would be anticompetitive in
ten local MWTS markets and challenged the
acquisition partly on that basis. MWTS is
provided using electromagnetic spectrum, the
rights to which are licensed by the Federal
Communications Commission. Among the
reasons the Department concluded that the
acquisition would not attract entry was
difficulty in obtaining licenses to the necessary
spectrum. The Department’s challenge to the
merger was resolved by a consent decree
requiring divestitures in particular locations.
Cephalon–Cima (FTC 2004) Cephalon, Inc.
proposed to acquire Cima Labs, Inc. Cephalon
was the only firm selling a breakthrough
cancer pain (“BTCP”) drug in the United
States. Evidence suggested that Cima was the
most likely first entrant with a BTCP drug to
rival Cephalon’s product, and that entry
subsequent to Cima’s was unlikely for at least
the next four years. The time needed to secure
FDA approval was a significant factor in
reaching this conclusion. The Commission
resolved its competitive concerns with a
consent order that required Cephalon, among
other things, to grant an irrevocable, fully paid
license to a specific third party for the
manufacture and sale of a generic formulation
of Cephalon’s BTCP drug.
Intellectual property rights such as patents can
at times pose a significant entry obstacle.
Intellectual property can be important in both
high-tech and low-tech industries.
3D Systems–DTM (DOJ 2001) 3D Systems
Corp. proposed to acquire DTM Corp., a
competitor in industrial rapid prototyping
systems, which are used to make functional
and non-functional prototypes of new products
or components. The Department challenged
the acquisition in part because the two
companies held extensive patent portfolios that
likely created an insuperable entry obstacle
even for well-established competitors outside
the United States. The Department’s challenge
to the merger was resolved by a consent decree
requiring divestiture of a package of
intellectual property rights.
Franklin Electric–United Dominion (DOJ
2000) The Department challenged the
proposed joint venture between subsidiaries of
Franklin Electric Co. and United Dominion
Industries because it would have eliminated
competition between the only two domestic
producers of submersible turbine pumps used
for pumping gasoline from underground
storage tanks at retail stations. The
Department found that the proposed merger
would be unlikely to attract entry for several
reasons, including the necessity of designing
around Franklin Electric’s patents. After trial,
a district court granted the Department’s
motion for a permanent injunction.
American Home Products–Solvay (FTC 1997)
American Home Products Corp. proposed to
acquire the animal health business of Solvay
S.A. The Commission found that the proposed
acquisition raised serious competitive concerns
in three, highly concentrated, relevant product
markets for the production and sale of animal
vaccines. The Commission found, moreover,
that post-merger entry was unlikely to mitigate
the competitive concerns because entry would
not be likely, timely, or sufficient. For each
relevant market, entry would require the
expenditure of significant resources over a
43

period of many years with no assurance that a
viable commercial product would result. The
time required to enter the relevant markets
could be further lengthened by the need to
obtain U.S. Department of Agriculture
approvals to sell the vaccines. Significantly,
the existence of broad patents governing the
manufacture of each of the relevant products
enhanced the difficulty of entry. As a result,
the Commission issued a complaint
challenging the proposed acquisition, and
ultimately reached a settlement with the
parties that called for, among other things,
divestiture of Solvay’s intellectual property
rights relating to the three vaccines.
Patents need not impose a significant obstacle
to entry, even in a high-tech industry with many
important patents. The Agencies may find that
the requisite technology is nevertheless reasonably
available, for example, because required patents
could easily be licensed or invented around.
Cinram–AOL Time Warner (DOJ 2003) The
Department decided not to challenge the
acquisition by Cinram International Inc. of the
DVD and CD replication assets of AOL Time
Warner Inc. in part because the requisite
technology was readily available for license
from patent pools. The Department also found
that sunk costs were relatively low and that the
prospects for recovering them were good due
to high demand growth.
A merger may lead to price increases without
attracting entry because potential entrants would
be unable to obtain a source of supply for essential
inputs, for example, when entry requires access to
scarce natural resources.
Imetal–English China Clays (DOJ 1999)
Imetal proposed to acquire English China
Clays, plc, both of which produced water-
washed kaolin and calcined kaolin. These
products are produced from kaolin clay, which
is quite scarce. Much of the world’s highest
quality kaolin is found in a small area within
Georgia. Among the reasons why the
Department concluded that the proposed
merger was unlikely to attract significant entry
was that an entrant would have difficulty in
acquiring suitable kaolin deposits. The
Department’s challenge to the merger was
resolved by a consent decree requiring
divestiture of a plant and associated assets
such as kaolin reserves.
Difficulty in securing essential inputs can
impede entry in a variety of contexts, particularly
when incumbents own or control access to the
inputs. In some cases, an entrant might find it
difficult to secure a source of supply for a
manufactured input product. In other cases,
gaining access to physical facilities built and
owned by third parties can pose a significant entry
obstacle. In addition, access to human resources
may pose a significant entry obstacle in some
markets.
DaVita–Gambro (FTC 2005) DaVita Inc.
proposed to acquire Gambro Healthcare, Inc.
The firms were rivals in the provision of
outpatient dialysis services. The Commission
alleged that anticompetitive effects would result
from the transaction in 35 local markets where
the firms competed. Laws applicable to dialysis
clinics required that each such clinic must have
a nephrologist as its medical director. In
addition, the medical director is the clinic’s
primary source of referrals and thus is essential
to the clinic’s competitiveness. A lack of
available nephrologists with an established
referral stream was an obstacle to entry into
each of the relevant geographic markets at issue.
To resolve the Commission’s concerns, the
parties entered into a consent agreement that
required, among other things, divestiture of
dialysis clinics in the markets at issue.
Central Parking–Allright (DOJ 1999) The
unavailability of facilities that had to be
provided by others made entry unlikely after
the proposed merger of Central Parking Corp.
and Allright Holdings, Inc. Both companies
operated off-street parking facilities in the
central business districts of many U.S. cities. In
these areas, land was scarce and typically had
uses higher-valued than parking lots, so
adding additional parking spaces typically
required the construction of a new office
building, and higher parking rates were not
likely to spur the construction of new office
buildings. The Department’s challenge to the
merger was resolved by a consent decree
requiring divestiture of parking facilities in
many cities.
44

Cost Disadvantages of Entrants
A merger may lead to price increases but not
attract entry because entrants would suffer a
significant cost disadvantage relative to
incumbents. The most common reason for a cost
disadvantage is the presence of significant
economies of scale and scope. In other situations,
entrants may be significantly disadvantaged by
economies of density in route delivery systems
(i.e., reductions in cost from increasing volume,
holding the size of a network fixed).
Waste Management–Allied (DOJ 2003) Waste
Management, Inc. agreed to acquire the assets
Allied Waste Industries, Inc. used in small
container commercial waste hauling in
Broward County, Florida. This portion of the
municipal solid waste business entails the
collection, transportation, and disposal of
waste generated by commercial
establishments. The Department challenged
the acquisition in part because an entrant
would be unable to operate efficiently and
provide meaningful price competition. To be
efficient, a competitor must achieve a high
route density by contracting with a large
number of commercial establishments in a
relatively small area. Doing so was found to be
exceptionally difficult for an entrant because
incumbents had secured many existing
customers through long-term contracts. The
Department’s challenge to the merger was
resolved by a consent decree requiring
divestiture of specified routes and the assets
used on them.
Federal-Mogul–T&N (FTC 1998) I n t h e m e r g e r
of Federal-Mogul Corp. and T&N PLC, one of
the markets the staff examined was the
manufacture and sale of engine bearings to the
aftermarket for repairing and overhauling
engines. Each engine bearing is designed for
and used in a particular truck or car engine,
and each engine can use only bearings
designed and built to its specifications. The
parties acquired the tooling for their broad line
of aftermarket bearings when engines were
first in production, allowing them to amortize
the cost of that tooling over a longer time and
over a larger number of bearings. A new
entrant that attempted to match an
incumbent’s product line would have been
able to amortize the tooling for many bearings
only over a portion of the engine’s life, and
would necessarily have higher relative costs.
This would have put any entrant in the
aftermarket at a substantial cost disadvantage
to the incumbent firms. Thus, the Commission
found that entry would not be timely or likely
to prevent anticompetitive effects. The
Commission resolved the matter with a
consent order that required, among other
things, divestiture of T&N’s engine bearing
business.
Timeliness of Entry
Section 3.2 of the Guidelines states that entry
generally is considered timely only if “achieved
within two years from initial planning to
significant market impact.” Even if a proposed
merger likely would attract entry that eventually
reverses any likely anticompetitive effect from a
merger, the Agencies nonetheless would challenge
the merger if they determined the entry would not
be timely. For many of the proposed mergers
discussed in this chapter, the Agencies found that
entry having a material effect on competition
would take significantly longer than the two-year
period specified by the Guidelines.
Alcan–Pechiney (DOJ 2003) The Department
challenged the proposed acquisition of
Pechiney, S.A. by Alcan, Inc. on the basis of
likely anticompetitive effects in the production
and sale of a class of aluminum alloys called
“brazing sheet.” Manufacturing brazing sheet
requires an expensive rolling mill, which the
Department found would take at least three
years to construct. The Department also found
that successfully selling brazing sheet requires
the mastery of alloy technologies and that it
likely would take several additional years after
a new mill commenced production to “qualify”
its output with major customers and begin
making significant sales. Thus, the
Department concluded that entry was unlikely
and would necessarily take far longer than two
years if it did occur. The Department’s
challenge to the merger was resolved by a
consent decree requiring divestiture of Alcan’s
brazing sheet business, including a smelting
facility, rolling mill, and associated intellectual
property.
45

Healthtrust–Holy Cross (FTC 1994) In a
merger between Healthtrust, Inc. - The
Hospital Co. and Holy Cross Health Services of
Utah, there was no CON regulation that would
preclude or delay entry into the market, and
prior entry of hospitals had occurred in the
geographic market. Nonetheless, the
Commission concluded that timely entry was
unlikely to prevent anticompetitive effects
from the merger under investigation because it
takes many years to plan and build a new
hospital. The Commission resolved its
competitive concerns arising from the
transaction by reaching a consent agreement
with the parties that, among other things,
included an order requiring divestiture of one
of the acquired firm’s hospitals.
In evaluating the timeliness of entry, the
Agencies include the time to complete any
necessary preliminary steps, such as establishing
a reputation or the development of specialized
inputs into the production of the product in
question.
Federal-Mogul–T&N (FTC 1998) Federal-
Mogul Corp. and T&N PLC, which proposed
to merge, competed in selling thin-wall engine
bearings, light-duty engine bearings, and
heavy-duty engine bearings to original
equipment manufacturers (“OEMs”) and to
customers in the aftermarket. These bearings
required specialized alloys developed for
specific applications. Entry required time to
develop such alloys, to design the specific
bearings for particular applications, and to test
and qualify in particular applications. For each
type of bearing, as to both OEM and
aftermarket customers, FTC staff found that
timely entry would not prevent
anticompetitive effects in the relevant markets.
Further, in the aftermarket, effective entry
required brand name recognition that took
additional time to develop. The Commission
resolved the matter with a consent order that
required, among other things, divestiture of
T&N’s engine bearing business.
Sufficiency of Entry
Section 3.0 of the Guidelines states that “[e]ntry
that is sufficient to counteract the competitive
effects of concern will cause prices to fall to their
premerger levels or lower.” Thus, even if the
evidence suggests that timely entry into the
relevant market is likely, the entry analysis is not
complete. The entry must also be of a character
and magnitude that it would “deter or counteract
the competitive effect of concern.”
Chicago Bridge–Pitt-Des Moines (FTC 2005)
The Commission ruled that the consummated
acquisition by Chicago Bridge & Iron Co. of
certain assets from Pitt-Des Moines, Inc.,
violated Section 7 of the Clayton Act and
Section 5 of the FTC Act. The merging parties
designed, engineered, and built storage tanks
for liquified natural gas (“LNG”), liquified
petroleum gas (“LPG”), and liquid
atmospheric gases such as nitrogen, oxygen,
and argon (“LIN/LOX”). They also designed,
engineered, and built thermal vacuum
chambers (“TVC”). TVCs and field-erected
tanks for LNG, LPG, and LIN/LOX are
custom-made to suit each purchaser’s needs,
and customers place great emphasis upon a
supplier’s reputation for quality and service.
For each of the relevant products, customers
generally seek competitive bids from several
suppliers.
The Commission found that some timely
entry into each of these markets might occur,
but that it was unlikely to be sufficient to
prevent anticompetitive effects from the
merger. Although new firms had appeared
and fringe firms had the intent to compete,
these firms were not found to be significant
competitors capable of replacing the
competition lost due to the merger. With
respect to the LNG tank market, the
Commission found that new entrants lacked
the reputation and experience that most
customers demand, and they lacked the
requisite personnel skills. With respect to the
LPG and the LIN/LOX tank markets, the
Commission found that, although the merging
parties identified a number of actual and
potential entrants, entry of those firms would
not prevent the anticompetitive effects of the
merger because the firms would not have the
attributes desired by most customers. The
record evidence showed no attempted entry
into the TVC tank market by any suppliers.
The Commission ordered, among other things,
divestiture of assets and other remedial action
46

to restore the competition lost as a result of the
transaction.
The Agencies’ reasons for concluding that
entry would not face significant obstacles also can
be relevant to determining whether entry would
be sufficient.
Sherwin-Williams–Duron (FTC 2004) The
Sherwin-Williams Co., the nation’s largest
manufacturer of architectural paint, proposed
to acquire Duron, Inc., a leading architectural
paint manufacturer in the eastern United
States. The firms were head-to-head
competitors in several metropolitan areas
where each had a relatively large number of
store locations. A focus of the Commission’s
investigation was on the potential effects of the
merger on professional contractors, which in
significant numbers patronize architectural
paint stores rather than other retailers of paint
(such as home improvement stores and other
big-box retailers). Staff concluded that this
class of customers made purchasing decisions
largely based on local market conditions that
determine price and service, rather than on
national or regional contracts with paint
suppliers.
The investigation assessed whether entry
would require a network of store locations to
compete effectively for professional painters’
business. Data analysis revealed that even
professional painters who use numerous
company stores during a year spend the vast
majority of their dollars at a limited number of
favored stores. Thus, the evidence showed
that professional painters did not rely on an
extended store network and would not likely
pay a premium to do business with firms that
operate a network of stores in a region. In
addition, even if a network of some size were
required, the requirements to open additional
stores did not pose an entry barrier. Few
significant obstacles appeared to prevent firms
with established brand names from opening
paint stores to serve professional painters. No
Commission action was taken.
47

4. Efficiencies
Merging parties may reduce their costs by
combining complementary assets, eliminating
duplicate activities, or achieving scale economies.
Mergers also may lead to enhanced product
quality or to increased innovation that results in
lower costs and prices or in more rapid
introduction of new products that benefit
consumers.
As the Guidelines state, efficiencies “can
enhance the merged firm’s ability and incentive to
compete, which may result in lower prices,
improved quality, enhanced service, or new
products.” Guidelines § 4. Moreover, when a
merged firm achieves such efficiencies, it may
induce competitors to strive for greater efficiencies
in

order to compete more effectively. Consumers
benefit from such increased competition.
Efficiencies may directly prevent the consumer
harm

that otherwise would result from a merger.
The Agencies thus do not challenge a proposed
merger “if cognizable efficiencies . . . likely would
be sufficient to reverse the merger’s potential to
harm consumers in the relevant market, e.g., by
preventing price increases in that market.”
Guidelines § 4. In analyzing mergers, including
the likely effects of cost reductions, the Agencies
assume that firms maximize

profits.

Other things
equal, a reduction in any cost that depends on a
firm’s output rate causes a profit-maximizing firm
to reduce prices. This

effect may be sufficient to
counteract a merger’s anticompetitive effects.
For example, one potential

concern is that a
proposed merger would increase the likelihood
that competitors will coordinate pricing and
output decisions in a

way that harms consumers.
In the presence of other conditions conducive to
coordination, uniform cost structures across
incumbent competitors may facilitate
coordination. Therefore, some mergers that
appreciably reduce the uniformity of costs across
competitors may disrupt existing coordination or
otherwise make coordination less likely. As a
lower-cost producer, the merged firm

may find it
profitable

to reduce prices notwithstanding its
rivals’ likely reactions. Similarly, sufficiently large
reductions in the marginal costs of producing and
selling the products of

one or both of the merging
firms may eliminate the unilateral incentive to
raise prices that the merger might otherwise have
created. In both of these situations, the Agencies
integrate efficiencies into their assessments of
competitive effects. In so

doing, the Agencies
assess the effects of the elimination of

competition
between the merging firms

in light of any
cognizable, merger-specific efficiencies.
Efficiencies in the form of quality
improvements also may be sufficient

to offset
anticompetitive price increases following a
merger. Because a quality improvement involves
a change

in product attributes, a simple
comparison of

pre- and post-merger prices could
be misleading.

A

careful analysis of the effects of
changes in

product attributes and prices on
consumer welfare is likely to be necessary.
Efficiencies the Agencies Consider
Section 4 of the Guidelines provides that, to be
considered by the Agencies, an efficiency must be
“merger-specific” and “cognizable.”
Merger-Specific Efficiencies
Efficiencies are not taken into account by the
Agencies if they are not merger-specific. Merger-
specific efficiencies are “those efficiencies likely to
be

accomplished with the proposed merger and
unlikely to be

accomplished in the absence of
either the proposed merger or another means
having comparable anticompetitive effects.” The
Guidelines explain that, although the Agencies ask
whether the efficiencies

can be achieved by means
other than the merger, “[o]nly alternatives that are
49

practical in the business situation

faced by the
merging firms will be

considered in making this
determination; the Agency will not insist upon a
less restrictive alternative that is merely
theoretical.”
The Agencies recognize that the merging
parties often have information with respect both to
how they plan to integrate after the merger and to
the effect of the integration on the merged firm.
Accordingly, the Agencies give full consideration
to the parties’ reasonable and well-supported
explanations of merger-specific cost savings.
Any efficiency that enables the combined firm
to achieve lower costs for a given quantity and
quality of product than the firms likely would
achieve without the proposed merger is merger-
specific. For example, if a

merged firm would
combine the production from two small or
underutilized facilities (one from each of the
merging firms) at one facility that has lower costs,
and if such a cost reduction could

not practically
be achieved without the merger (e.g., by one of

the
merging firms combining two of its own
underutilized facilities or through rapid internal
growth), this cost reduction is merger-specific.
Such a cost reduction benefits consumers

to the
extent that it makes the merged firm a

more
vigorous competitor, reduces prices, or expands
output.
That an efficiency theoretically could be
achieved without a merger—for example, through
a joint venture or contract—does not disqualify it
from consideration in the analysis. Many joint
venture agreements or contracts may not be
practically

feasible or may impose substantial
transaction costs (including monitoring costs). In
their assessment of

proffered efficiency claims, the
Agencies accord appropriate weight to evidence
that alternatives to the merger are likely to be
impractical or relatively costly.
Al
pha–Beta (Disguised FTC Matter) A
proposed merger of two of the largest gizmo
manufacturers (“Alpha” and “Beta”) would
create a firm with a market share in excess of
30%. In addition to its manufacturing
business, Alpha owned a subsidiary company
engaged in industrial packaging. At the time
of the proposed merger, Alpha’s packaging
subsidiary had unutilized capacity. Among
the subsidiary’s customers was Beta, which
owned Get-To, Inc., a company that dispenses
gizmos to customers located in isolated areas
not otherwise served by normal distribution
channels. The parties planned to combine
Alpha’s unused packaging capacity with Get-
To’s demand

for packaging. The parties
claimed that this combination would yield
significant cost savings.

Commission staff
concluded that, although such an arrangement
may yield savings, the savings would not be
merger-specific. Beta already was an Alpha
customer, and the evidence suggested that,
even in the absence of the merger, Alpha and
Beta were in the position readily to expand
their existing packaging services contract to
achieve the claimed savings. The Commission
did not challenge the merger because evidence
was insufficient to show that the merger was
likely to cause competitive harm.
N
ucor–Birmingham Steel (DOJ 2002) Nucor
Corp.’s acquisition of substantially all of the
assets of Birmingham Steel Corp. raised
competitive concerns because the firms owned
two of the three mills producing certain types
of steel bar in the western United States. The
Department concluded, however, that the third
western mill and other domestic mills would
substantially constrain any post-merger price
increases and that the merger likely would
generate significant efficiencies. The
Department found that the acquisition would
allow the merged firm to close some
distribution facilities and to supply some
customers from a closer mill at a lower
delivered cost. The Department also found
that the acquisition would provide a Nucor
mill with a lower cost input supply from
Birmingham, although some of the savings
might have been obtainable through a
contractual arrangement. Even though some
of the latter efficiencies may not have been
merger specific, the Department concluded
that plausible merger-specific reductions in
variable costs were significant relative to the
worst case scenario of anticompetitive effects
from the acquisition, and the Department
granted early termination under HSR.
Competition spurs firms

to implement cost
reduction initiatives, and those likely to be
implemented without a proposed merger do not
yield merger-specific efficiencies. For example,
the parties may believe that they can reduce costs
50

by adopting

each other’s “best practices” or by
modernizing outdated equipment. But, in many
cases, these efficiencies can be achieved without
the proposed merger. The presence of other firms
in the industry unilaterally adopting similar “best
practices” would suggest that such cost savings
are not merger-specific. By contrast, if a “best
practice” is protected by intellectual property
rights, then it could be the basis for a merger-
specific efficiency claim.
Merging parties also may claim cost savings
from combining sales and realizing economies of
scale. These types of economies, however, might
be realized from internal growth.

If such
unilateral changes are likely without the proposed
merger (for example, if they have already been
planned), they are not merger-specific. Timing
can be an important factor in the consideration of
such claims. If a merger can

be

expected
significantly to accelerate the achievement of
economies of scale due to increased sales as
compared to internal growth, the Agencies credit
the merger with merger-specific acceleration of the
cost reduction.
Cognizable Efficiencies
The Guidelines define cognizable efficiencies to
be “merger-specific efficiencies

that have been
verified and do not arise from anticompetitive
reductions in

output or service.” Moreover,
“[c]ognizable efficiencies are assessed net of costs
produced by the merger or incurred in

achieving
those efficiencies.” Guidelines § 4.
The parties can facilitate the Agencies’
assessment of whether efficiency claims are
cognizable by providing documentation that is
logical,

coherent, and grounded on facts and
business experience. It is in the parties’ interest to
provide detailed information on the likelihood,
magnitude, and timing of claimed efficiencies.
They may, for example, draw on a detailed
business plan that describes how the merged firm
intends to achieve the efficiencies. If not already
included in the business plan, the parties should
also consider providing supporting evidence that
justifies the planning methods and shows the
reasonableness of applied assumptions.
When efficiencies are an important business
motive for the merger, information pertinent to
verification will often exist prior to the Agencies’
antitrust review of the merger. In other
situations—particularly when

projected
efficiencies are not a principal motive for the
merger and evidence to substantiate claims has
not been prepared

prior to the merger
agreement—the parties can elect to develop and
submit to the reviewing Agency evidence (e.g.,
documents, data, consultant reports, or evidence
from

past experiences) to substantiate the claimed
efficiencies.
Arc
h Coal–Triton (FTC 2004) Pursuant to a
Commission action in federal district court to
enjoin the proposed merger of Arch Coal, Inc.
and Triton Coal Co. LLC, the parties claimed
merger-specific efficiencies totaling $130
million to $140 million over a five-year period.
The parties’ efficiency claims included cost-
savings from equipment and operator
reductions, the ability to extract additional coal
through redeployment of coal mining
equipment, insurance premium reductions,
and safety improvements. Commission staff
found that Arch Coal failed to substantiate
many of its claimed savings and, in some
instances, employed a methodology that
overstated savings. Therefore, the staff
determined that a substantial portion of Arch’s
claimed savings were not cognizable. For
example, staff found that claims related to the
ability to extract additional coal through
redeployment of coal mining equipment were
overstated because staff believed Triton would
recover the additional coal absent the merger,
just not as quickly as Arch would be able to in
the combined operation. The court denied the
Commission’s preliminary injunction request
and, after further investigation, the
Commission decided not to pursue further
administrative litigation.
Oracle–PeopleSoft (DOJ 2004) Oracle Corp.
made an unsolicited tender offer for
PeopleSoft, Inc. Oracle and PeopleSoft
competed in the sale of Enterprise Resource
Planning software, which provides tools for
automating essential operating functions
within large organizations. Oracle Corp.
claimed that the proposed takeover would
produce cost reductions of more than $1 billion
per year. Although these claims were based on
projections made by a high ranking executive,
the Department’s attempts to verify these
claims revealed that they were predicated on
51

little more than unsupported speculation

with
no allowance having been made for

the

costs of
integrating the two companies. Moreover, the
Department concluded

that at least a
significant portion of the projected cost savings
were a consequence of projected reductions in
sales that would be the result of eliminating the
R&D and sales staffs of PeopleSoft. The
Department

found that, for the most part, the
cost reductions would stem

from
anticompetitive reductions in innovation,
service, and output, and therefore did not
reflect cognizable efficiencies. The Department
filed suit to block the transaction, but the
district court declined, on other grounds, to
enjoin it.
Verification of Efficiency Claims
After the parties have presented substantiation
for their claimed merger-specific efficiencies, the
Agencies attempt to verify those claims. The
verification process usually includes, among other
things, an assessment of the parties’ analytical
methods, including the accuracy of their data
collection and measurement, an evaluation of the
reasonableness of assumptions in the analysis, and
scrutiny into how well the parties’ conclusions
stand up to modifications in any assumptions (i.e.,
the “robustness” of the parties’ analysis). To
evaluate the parties’ efficiency claims, the
Agencies typically review the parties’ internal
documents and data, as well

as the statements of
knowledgeable company personnel. In some
cases, to evaluate further how realistic the claimed
efficiencies are, the Agencies also contact third
parties, for example, to learn what efficiencies
others have

been able to achieve and how they
have achieved those efficiencies.
The Agencies recognize that assessing a
proposed merger’s potential efficiency benefits,
like its competitive effects, necessarily involves
projections

about the future. The Agencies

do

not
automatically reject a claim due to

minor
discrepancies uncovered in the verification
process. Nor do the Agencies

reject an

efficiency
claim solely because the efficiency has never
before been accomplished. Shortcomings in the
substantiation of a particular efficiency claim may
cause the Agencies to reduce the magnitude of the
efficiencies associated with that claim rather than
to reject

the claim altogether. Similarly, the fact
that one stand-alone efficiency claim cannot

be
verified does not necessarily result in rejection of
other claims.
The stronger the supporting evidence, the more
credence the Agencies are likely to

give the
claimed efficiencies

in

the competitive effects
analysis. Efficiency claims that are vague,
speculative, or unquantifiable and, therefore,
cannot be verified by reasonable means, are

not
credited.

For example, a general claim that the
acquiring firm will save 20%

of the acquired firm’s
expenses, without substantiation, generally would
not be credited.
Fine Look–Snazzy (Disguised FTC Matter) In
a proposed merger of two consumer products
packagers, Fine Look and Snazzy, the parties
claimed efficiencies from rationalization and
consolidation of packaging facilities (“PFs”);
elimination of duplicate corporate overhead;
and combining specialty packaging operations.
Commission staff determined that a portion,
but not all, of the savings claimed through
consolidation of PFs was merger-specific and
cognizable, but rejected the other claims
because they could not be reasonably verified
and thus were not cognizable. The
Commission did not challenge the merger
because evidence was insufficient to show that
the merger was likely to cause competitive
harm. The Commission credited the portion of
the parties’ efficiency claims that staff found to
be merger-specific and cognizable.
First, the staff considered the consolidation
of PFs. Fine Look operated 30 PFs and Snazzy
operated 20. The parties planned to operate 35
PFs after the merger by closing 15 owned by
Fine Look and 10 owned by Snazzy, and by
building 10 new PFs. The parties claimed that
sales from the closed Fine Look PFs would be
shifted to Snazzy PFs and that this shift would
result in reduced operating and delivery costs
at the Snazzy PFs. Similarly, savings would
derive from reduced operating costs at Fine
Look PFs because of transferred sales from
closed Snazzy PFs. The parties also claimed
reduced inventory costs tied to reducing the
number of PFs.
In estimating the potential savings from
closing PFs, the parties assumed that all PF
costs would be eliminated except for certain
variable costs that would be shifted to the
52

remaining PFs. In the case of the 15 Fine Look
PFs projected to be closed, the parties provided
reasonable substantiation of

these cost savings
derived from Fine

Look

cost records.
Nonetheless, the parties’ estimates assumed
that, in each case of

a

closing, the remaining
post-merger PFs would retain 100% of the
customers of the closed PFs. The parties
provided no analysis respecting how sensitive
their estimates were to this key assumption.
In addition, at least

some of the
consolidations for which the parties claimed
efficiencies were purely intra-Snazzy (i.e.,
closing one Snazzy

PF

in proximity to another
Snazzy PF). Staff concluded that such
consolidations would not be merger-specific.
Furthermore, the claimed savings from
closings of the

Snazzy PFs were not
substantiated from cost records, but instead
were conjecture. Staff could not accept these
claims.
Based on all of the claims respecting PF
consolidation, staff concluded that only
savings associated with the 15 Fine Look
closings for which substantiation was provided
were cognizable. But because no sensitivity
analysis was performed regarding the
assumption on the

retention of customers, staff
considered the estimated savings from the
closing of

the Fine Look PFs to be only an
upper bound on the potential savings.
Second, the staff considered the corporate
savings. The parties made a very rough
calculation of projected savings through
consolidation of various corporate functions.
They contended that 75% of one party’s
corporate expenses would be eliminated

by
this consolidation. The calculation, however,
was unsubstantiated conjecture rather than an
analysis based on objective data that Agency
staff could evaluate.

St aff thus found the claim
not to be cognizable.
Third, the staff considered the specialty
packaging operations. Both Fine Look and
Snazzy operated specialty packaging facilities
for high-end luxury widgets, independent of
their other PFs.

The parties planned to
consolidate Fine Look’s specialty business into
Snazzy’s specialty business.

They claimed that
this consolidation would reduce costs because
it would yield savings of 50% in operating
expen
ses. In deposition, a senior executive
admitted that the 50% figure was merely an
unsupported assumption. Staff concluded that
the parties’ failure to provide sufficient
evidence in support of the claim made the
efficiency claim unverifiable and therefore not
cognizable.
The Agencies may accord less significance to
shortcomings in the documentation of claimed
efficiencies when the weight of evidence suggests
that merger-specific efficiencies appear to be
significant and likely to be achieved.
Genzyme–Novazyme (FTC 2004) Genzyme
Corp. acquired Novazyme Pharmaceuticals,
Inc., combining the world’s only firms engaged
in developing the first enzyme replacement
therapy (“ERT”) to treat Pompe disease, a rare,
fatal disease that affects about 10,000 people
worldwide. Whether either firm’s Pompe drug
would make it to market was not certain, but
the acquisition left Genzyme as the only firm
engaged in developing Pompe ERT treatments.
Genzyme asserted that, even without
competition from Novazyme, it had the
incentive to bring its Pompe product to market
in the fastest possible time frame.
Genzyme also asserted that the acquisition
had resulted in significant efficiencies.
Genzyme claimed that each firm had unique
skills and expertise, and that, by combining,
the merged firm could accelerate development
of Genzyme’s and Novazyme’s Pompe drugs.
Genzyme asserted that it possessed certain
unique capabilities and technologies that it was
applying to Novazyme’s Pompe drug. The
Commission voted to close the investigation
without challenging the transaction due, in
part, to the evidence supporting the claim that
the merger would accelerate development of
the drug.
The best way to substantiate an efficiency claim
is to demonstrate that similar efficiencies were
achieved in the recent past from similar actions.
Documentation must be based on appropriate
methods and realistic assumptions, and ideally
would be grounded on actual experience. For
example, a firm that recently combined its own
distribution centers, or consolidated distribution
centers after a recent merger, could use its actual
cost savings experiences in those instances as a
53

basis for, and to substantiate claims made about,
efficiency claims arising

from

combining
distribution centers after a proposed merger.
If the parties cannot point to similar efficiencies
achieved in the recent past, they should

use the
best information available to substantiate their
efficiency claims. For example, the parties might
do an internal study and analysis of expected
efficiencies using recent cost records and other
pertinent objective data. In addition, some parties
have found outside consultants helpful in
substantiating efficiency claims.
The Agencies may verify and accept part of an
efficiency claim. For

example, an acquiring firm
might estimate a particular efficiency by assuming
that all of the acquired firm’s

customers and sales
will transfer to the merged entity when experience
suggests that

customers and sales are not likely to
transfer completely. Or, a party may estimate the
dollar value of a particular efficiency using a
discount rate that is significantly different from
the discount rate it normally uses, without any
justification for the difference.

In such cases, the
differences between the parties’ efficiencies
estimates and ones using the more supported
assumptions are not

verifiable, and those portions
of the efficiency claims are unlikely to be credited.
A-1
Goods–Bingo (Disguised FTC Matter) In
a proposed merger of consumer products
companies, A-1 Goods, Inc. and Bingo Co., the
parties claimed cost savings of several million
dollars from a reduction in the sales force and
a combining of certain manufacturing facilities.
Commission staff concluded that the parties’
estimates were exaggerated. Staff credited
some, but not the entire dollar amount of the
claims.
First, the staff considered the sales force
reduction. The parties claimed that the merger
would permit the post-merger firm to
eliminate the equivalent of 90% of one of the
party’s pre-merger sales force, representing
approximately 40% of the combined pre-
merger sales employees. For calculating the
estimated efficiencies, the parties assumed that
the combined post-merger output would be the
same as that before the merger. They also
assumed that pre-merger levels of marketing
and selling support to customers would be
maintained. Achieving these efficiencies
would require one-time costs approximating
almost 80% of the projected annual cost
savings.
These one-time costs derived from
severance

payments and relocation expenses.
Evidence from the parties suggested that the
claims were based on aggressive

assumptions.
For this

reason, Commission staff discounted
the parties’ estimates. Applying more
reasonable assumptions, the staff credited most
of the parties’ claimed cost savings, from
which the one-time cost of achieving the
efficiencies was subtracted.
Second, the staff considered the
consolidation of

manufacturing facilities. The
parties claimed several million dollars in
projected savings from the expected
consolidation of certain

manufacturing
facilities. The parties planned to shut down an
A-1 production facility

and consolidate its
output into a Bingo plant. The post-merger
output rate was to be the same as on a
combined, pre-merger basis, but with fewer
people needed to run the consolidated
manufacturing operations. To maintain the
same rate of pre-merger output, the parties
envisioned that 70% of A-1’s manufacturing
equipment in the shut-down facility would

be
moved to unused space at the Bingo facility,
adding to the overall manufacturing capacity
of that facility. In addition, a

number of A-1
employees would be relocated to the Bingo
plant, while other employees would be let go.
Certain retooling and

capital expenditures
related to integrating manufacturing
operations would have to be incurred.
The parties claimed that no arrangement
other than the proposed merger would
generate the efficiencies claimed. They
contended that any non-merger arrangement
would raise insurmountable issues of control,
allocation of savings between owners, transfer
pricing problems, and issues dealing with the
sharing of proprietary knowledge. To buttress
this point, the parties presented Commission
staff with

evidence that the parties

considered
entering into contract manufacturing
arrangements, joint ventures, and other
internal

measures

to save money on
production, but concluded that these were
impractical or could not bring

about the
desired level of efficiencies. Based in part on
this evidence, Commission staff concluded that
54

the claimed efficiencies were merger-specific
and cognizable.
The Commission ultimately decided not to
challenge the merger on the grounds that it
posed no substantial threat to competition,
irrespective of any efficiency claims.
When parties to a merger base an efficiency
claim on past experience, the Agencies examine
whether the

experience is indicative of what is
likely to occur with the merger. If

the experience
was far out of the ordinary (e.g., during
bankruptcy, a worker’s strike, drought, or war),
the Agencies may not credit the claims.
Sufficiency of Efficiencies
As noted in section 4 of the Guidelines, the
Agencies seek to determine “whether cognizable
efficiencies likely would be sufficient to reverse
the merger’s potential to harm consumers in the
relevant market, e.g., by preventing price
increases in that market.” Within the integrated
analysis framework for evaluating competitive
effects, “efficiencies are most likely to make a
difference in merger analysis when the likely
adverse competitive effects, absent the efficiencies,
are not great.” Efficiencies are a significant factor
in the Agencies’ decisions not to challenge some
mergers that otherwise are likely to have, at most,
only slight anticompetitive effects.
Toppan–DuPont (DOJ 2005) Photomasks are
the masters from which integrated circuits are
produced. Toppan Printing Co., Ltd. was a
Japanese company that had recently begun
competing in the United States. Toppan was
proposing to acquire DuPont Photomasks, Inc.,
which was one of its three competitors for U.S.
sales of the highest technology photomasks.
The Department found that competition was
best modeled as an auction process, with each
auction essentially a separate relevant market.
The Department’s economists used a formal
auction model to estimate the likely price
effects of the transaction. This exercise
indicated that, even without any efficiencies,
the acquisition most likely would lead to, at
most, only small price increases. Incorporating
the portion of the claimed efficiencies the
Department determined to be merger-specific
and cognizable indicated that the transaction
would not lessen the welfare of U.S. customers
under the assumptions considered most
plausible. Accordingly, the Department did
not challenge the merger.
PayPal–eBay (DOJ 2002) PayPal, Inc. and
eBay, Inc. provided competing person-to-
person payment systems used largely to
complete transactions following eBay auctions.
Even though the person-to-person payment
systems offered advantages over the other
means of payment, the Department decided
not to challenge eBay’s acquisition of Pay Pal
principally because other means of payment
substantially constrained eBay’s ability to
increase fees after the acquisition. Efficiencies
to be gained by integrating PayPal with eBay
were also a factor in the Department’s analysis.
Integrating the two would make transactions
more convenient for eBay buyers and also
improve the detection of fraud by combining
the information that had been separately
amassed by the two companies.
DirecTV–Dish Network (DOJ 2002) DirecTV
Enterprises Inc. was owned by Hughes
Electronics Corp., which was owned by
General Motors Corp. DirecTV operated one
of two direct broadcast satellite (“DBS”)
services in the United States. EchoStar
Communications Corp., which operated the
other DBS service, Dish Network, proposed to
acquire Hughes. Economists working for the
parties and economists in the Department both
engaged in extensive modeling of the
competition between the two DBS services and
with cable television operators with which the
DBS services competed in providing
“multichannel video programming
distribution.”
The Department concluded that this
modeling supported the conclusion that the
acquisition would substantially harm
consumers and filed suit to prevent its
consummation. Shortly thereafter, the
acquisition was abandoned. The Department’s
modeling indicated that efficiencies claimed by
the parties would be insufficient to prevent the
merger from creating significant
anticompetitive effects.
One source of claimed efficiencies was the
reduction of programming costs.
Incorporating the Department’s best estimate
of those reductions into the modeling only
55

slightly reduced the likely price increase from
the proposed acquisition. A second source of
claimed efficiencies was a quality
improvement; by combining the two services,
it

would be possible to

offer

local
programming in many additional metropolitan
areas with the available satellite

bandwidth.
The Department’s analysis indicated that the
consumer

benefits from this quality
improvement were far from sufficient to
prevent the merger from harming consumers
and also would be realized without the
merger.
Ener
co–KleenBurn (Disguised FTC Matter)
Enerco and KleenBurn Refinery, Inc. were
gasoline refining and

distribution firms that
proposed to

merge. The transaction involved
the markets for bulk supply of conventional
gasoline in the “Plains Corridor” and for bulk
supply of reformulated gasoline (“RFG”) in
Metropolis. The

parties claimed that the
transaction would create

substantial
efficiencies in refinery and pipeline operations.
Enerco asserted that the KleenBurn refinery
could, with relative ease,

be integrated into
Enerco’s nearby refinery, which, in turn, would
enable Enerco to generate substantial
operational efficiencies by enhancing its ability
to (1) coordinate the acquisition of crude oil
and lower raw material costs; (2) align more
efficiently the production processes of various
light petroleum products, including
conventional gasoline and

RFG; (3) increase
available storage to permit Enerco to
manufacture and sell more gasoline grades;
and (4) better plan and consolidate shipments.
Commission staff concluded that at least some
portion of the parties’ efficiency claims were
likely to be cognizable.
Enerco documents showed that it based

a
large portion of

its

bid on

the value of expected
synergies.

When the expected synergies were
counted, the refinery’s value was estimated to
increase four-fold over the KleenBurn
refinery’s stand-alone value. This estimated
increase was about the same

amount that
Enerco offered to pay. Enerco’s willingness to
pay upfront for

these synergies lent credence
to its claims.
Enerco contended that the savings from
these efficiencies would enable it to continue
operating the KleenBurn refinery beyond the
date that the refinery otherwise would have
been expected to

be decommissioned. Enerco
further claimed that its previous

efforts

to

meet
new low-sulphur gasoline standards would
enable KleenBurn to comply with those
standards sooner and at lower cost. Thus,
Enerco could, with less investment,

maintain
or exceed Kleenburn’s historical production
levels. Enerco financial analyses confirmed
that it planned to run the KleenBurn refinery at
or above current output rates.
Enerco asserted that it would connect the
KleenBurn refinery to Enerco’s Metropolis-area
refineries, and reallocate Kleenburn barrels for
sale in neighboring states, while reserving
Metropolis-area barrels for shipment west.
The Plains Feeder Line Pipeline tariff was
substantially higher from the KleenBurn
facility than from Enerco’s refineries, and
Enerco claimed that it would save over $1
million in variable delivery costs.
Enerco planned to ship several million
barrels per day of combined refinery output
into the Plains

Corridor on Plains Feeder Line
under

this lower tariff. Because most bulk
conventional gasoline shipped into the Plains
Corridor was purchased FOB refinery gate in
Metropolis, the tariff savings would, in most
instances, inure directly to customers in the
Plains Corridor. These customers had the
existing shipping rights on Plains Corridor
gasoline during the summer months when the
pipeline is frequently prorated.
The Commission ultimately decided not to
challenge the merger on

the grounds that it
posed no substantial threat to competition,
irrespective of any efficiency claims.
“Out-of-Market” Efficiencies
In some cases, merger efficiencies are “not
strictly in the relevant market, but so inextricably
linked with it that a partial divestiture or other
remedy could not feasibly eliminate the
anticompetitive effect in the relevant market
without sacrificing the efficiencies in the other
market(s).” Guidelines § 4 at n.36. If out-of-
market efficiencies are not inextricably linked to
the relevant market, the Agencies often find an
acceptable narrowly tailored remedy

that
preserves the efficiencies

while preventing
56

anticompetitive effects.
Genzyme–Ilex (FTC 2004) Genzyme Corp.
proposed to acquire Ilex Oncology, Inc. Ilex
had one FDA-approved product, Campath, an
oncology product used off-label in the solid
organ transplant field. Genzyme did not
compete with Campath in oncology but had a
drug that was Campath’s closest competitor in
the market for solid organ transplant acute
therapy drugs. The acquisition would have
eliminated direct competition between
Genzyme’s market-leading drug,
Thymoglobulin, and Campath.
The companies asserted that the transaction
would yield significant efficiencies for
oncology treatment and development. The
primary efficiency encompassed several
diagnostic tests that could aid the expansion of
Campath for treatments in leukemia and other
oncology and immune-related diseases by
identifying patients who are most likely to
benefit from Campath treatment.
After investigation and analysis of this
efficiency, Commission staff concurred that
Genzyme likely would improve Campath’s
quality and breadth of treatment in oncology.
The companies did not demonstrate, however,
that credible efficiencies would result in the
solid transplant organ area. In light of the
efficiencies in oncology and immune-related
disease areas, the Commission tailored a
remedy to alleviate the competitive concern in
the market for solid organ transplant drugs
while allowing the merged company to realize
the potential efficiencies in oncology and other
areas. In a consent order, the Commission
required Genzyme, among other things, to
divest contractual rights to Campath for use in
solid organ transplant.
Inextricably linked out-of-market efficiencies,
however, can cause the Agencies, in their
discretion, not to challenge mergers that would be
challenged absent the efficiencies. This
circumstance may arise, for example, if a merger
presents large procompetitive benefits in a large
market and a small anticompetitive problem in
another, smaller market.
Gai’s–Unit
ed States Bakery (DOJ 1996)
United States Bakery and Gai’s Seattle French
Bakery Co. proposed a joint venture, which the
Department viewed as a merger. The two
companies sold bread products in competition
with one another in the Pacific Northwest, and
the Department was concerned about the
competitive effects of the transaction on
restaurants and institutional accounts,
particularly fast food restaurants, because the
two companies accounted for more than 90%
of the bread sales to such customers.
Supplying such customers required a higher
level of service (e.g., much more frequent
deliveries) than supplying retail stores, and
few bakeries provided that level of service.
Without entirely resolving issues relating to
competitive effects and entry, the Department
decided not to challenge the transaction,
concluding that the efficiencies likely would
cause the merger to benefit the merged firm’s
customers as a whole.
Critical to the Department’s assessment was
the fact that the merger-specific efficiencies
would benefit all customers, and the restaurant
and institutional customers potentially of
concern accounted for only about 20% of the
companies’ sales. The two groups of
customers were buying essentially the same
products, produced with the same facilities.
Because it was otherwise impossible to
preserve the efficiency benefits to all
customers, the Department did not challenge
the merger.
Fixed-Cost Savings
Merger-specific, cognizable efficiencies are
most likely to make a difference in the Agencies’
enforcement decisions when the efficiencies can be
expected to result in direct, short-term,
procompetitive price effects. Economic analysis
teaches that price reductions are expected when
efficiencies reduce the merged firm’s marginal
costs, i.e., costs associated with producing one
additional unit of each of its products. By
contrast, reductions in fixed costs—costs that do
not change in the short-run with changes in output
rates—typically are not expected to lead to
immediate price effects and hence to benefit
consumers in the short term. Instead, the
immediate benefits of lower fixed costs (e.g., most
57

reductions in overhead, management,

or
administrative costs) usually accrue to firm
profits.
Exceptions to this general rule, however, exist.
For example, under certain market or sales
circumstances, fixed-cost savings may result in
lower prices in the short term. Selling prices that
are determined on a “cost-plus basis” (e.g., cost-
based contracts) can be influenced by changes in
fixed costs. Contractual arrangements also may
allow fixed-cost savings to be passed through.
The Agencies consider merger-specific,
cognizable reductions in fixed costs, even if they
cannot be expected to

result in direct, short-term,
procompetitive price effects because consumers
may benefit from them

over the longer term even
if not immediately. As with any other type of
efficiency, reductions in fixed costs must be
substantiated by the parties and verified by
reasonable means.
Veri
zon–MCI; SBC–AT&T (DOJ 2005) In 2005
Verizon Communications, Inc. and SBC
Communications, Inc., the nation’s two largest
regional Bell operating companies, sought to
acquire MCI Inc. and AT&T Corp., the nation’s
two largest inter-exchange (long distance) and
competitive local exchange (local service)
carriers. To a significant extent, the pairs of
firms proposing to merge were engaged in
complementary activities. Verizon and SBC
dominated local exchange and access service in
their respective territories but had limited
long-haul networks and only moderate success
with large enterprise customers. MCI and
AT&T had extensive long-haul networks and
were the leading providers of
telecommunications services to large
businesses. The Department concluded that
the proposed mergers would substantially
lessen competition only in the facilities-based
local private line services to many buildings for
which the merging pairs of firms owned the
only lines.
The Department investigated the effects of
the transactions on competition in residential
local and long distance telephone service,
internet backbone services, and a variety of
other telecommunications services. A
significant factor in the Department’s decision
not to challenge the proposed mergers was that
the transactions were likely to produce
substantial efficiencies. The merging inter-
exchange carriers, AT&T and MCI, sell
advanced retail products to enterprise
customers and generally have relied on local
exchange carriers, such as their merger
partners, for customer access. The merging
local exchange carriers, SBC and Verizon,
similarly have relied on inter-exchange carriers
in selling advanced retail products to multi-
region and out-of-region enterprises. The
merger allowed each of the firms to provide
these products at a lower cost to the customers
by making inputs and complementary
products available at a lower cost.
IMC Global–Western Ag (DOJ 1997) IMC
Global Inc. proposed to acquire Western Ag-
Minerals Co. The two companies operated the
only potash mines and processing facilities in
the Carlsbad region of New Mexico, which
contains the only known reserves of
langbeinite in the Western Hemisphere.
Langbeinite is a mineral used to produce an
agricultural fertilizer supplying magnesium,
potassium, and sulfur, which are important in
the production of certain crops and in
correcting deficiencies in certain soils.
Critically, langbeinite supplies these important
elements without also containing significant
amounts of chlorine.
It is possible to produce a fertilizer with the
same qualities from other minerals, but the
Department’s preliminary analysis indicated
that a single owner of both langbeinite mines
would find it optimal to raise prices
significantly in the absence of any efficiencies
from combining the mines. The Department,
nevertheless, decided not to challenge the
merger because of substantial merger-specific
efficiencies. The parties provided the
Department with studies indicating that
combining the two mining and processing
operations would result in substantial
efficiencies that could be achieved in no other
way.
To verify these claims, the Department
hired a consulting mining engineer to conduct
an independent study of both the benefits of
combining the two operations and alternative
means of achieving particular efficiencies. The
independent study concluded that the parties’
efficiency claims were conservative. Among
58

other things, the

study concluded that IMC
would avoid

substantial costs by transporting
the Western-Ag ore through its mine to its
processing plant at

the

mine mouth. Western-
Ag had been shipping the ore to its off-site
processing plant.

The study found additional
efficiencies

in combining the mining and
processing of

the other important mineral,
sylvite, found on the adjoining IMC and
Western-Ag properties.
The evidence ultimately indicated that the
annual dollar savings from the merger would
be as much as ten times the likely annual
increase in customer costs from the merger,
absent any efficiencies. Because the magnitude
of the merger-specific cost savings dwarfed
any potential effects exclusive of factoring in
these savings, the Department did not
separately evaluate the extent to which the
efficiencies

were likely to affect fixed costs
versus variable costs.
Supporting Documentation
As with the Guidelines, the Commentary
addresses how the Agencies assess the likely
competitive effects of horizontal mergers but not
the assignment of burdens of proof or burdens of
coming forward with evidence. In litigation, the
parties have the burden on any efficiencies claim
(Guidelines § 0.1 n.5), and it is to their advantage
to present efficiency claims (including supporting
documents and data) to the reviewing Agency as
early as possible. The Agencies, for their part,
make a serious effort to assess each efficiency
claim made. Early receipt of documentation
relating to the nature and size of efficiencies
allows the Agencies to factor fully the cognizable
efficiencies into an integrated analysis of the likely
overall competitive effects of the merger. In
particular, the parties may want to highlight
significant documents that support their claims
and to make their experts (for example,
accountants, engineers, or economists) available as
early as feasible to discuss specifics regarding
efficiencies. Doing so helps underscore the
seriousness of efficiency claims and assists the
Agencies in according the appropriate weight to
efficiency considerations in assessing the mergers
before them.
The Agencies recognize that, in many cases,
substantiation of efficiency claims requires the
collection, compilation, and analysis of
competitively significant data and information
from both of the merging parties. The sharing
between rivals of proprietary information having
potential competitive significance necessarily
raises

concerns about violations of section 1 of

the
Sherman

Act, 15 U.S.C. § 1, and section 5 of the
Federal Trade Commission Act, 15 U.S.C. § 45.
Furthermore, the Hart-Scott-Rodino Act, 15 U.S.C.
§ 18a, prohibits changes in beneficial ownership
prior to the end of the HSR waiting period.
Although prudent firms are cognizant of so-
called “gun jumping” concerns, they can adopt
appropriate safeguards to enable them to collect
the information necessary to substantiate their
efficiency claims.

Information exchanges
reasonably related to due diligence and
integration planning that are accompanied by
safeguards

that prevent any other pre-merger use
of that information are

unlikely to be unlawful.
The Agencies are mindful of the parties’ need to
provide sensitive efficiencies-related information
and, in that vein, the Agencies

note that the
antitrust laws are flexible enough to allow the
parties to adopt reasonable

means

to achieve that
end lawfully.
59

Referenced Agency Materials
Horizontal Merger Guidelines (jointly issued April 2,
1992 and revised April 8, 1997), available at
http://www.usdoj.gov/atr/public/guidelines/
hmg.pdf and http://www.ftc.gov/bc/docs/
horizmer.htm
Horizontal Merger Investigation Data, Fiscal Years
1996–2003 (issued by the Commission
February 2, 2004 and revised August 31, 2004),
available at http://www.ftc.gov/opa/2004/
08/fyi0450.htm
Merger Challenges Data, Fiscal Years 1999–2003
(jointly issued December 18, 2003), available at
http://www.ftc.gov/os/2003/12/mdp.pdf and
http://www.usdoj.gov/atr/public/201898.pdf
Merger Enforcement Workshop proceedings,
including transcripts, presentations, submitted
papers, and public comments are all available
at http://www.ftc.gov/bc/mergerenforce/
index.html and http://www.usdoj.gov/atr/
public/workshops/mewagenda2.htm
Merger Review Process Initiative (issued by the
Department October 12, 2001 and revised
August 4, 2004), available at http://www.
usdoj.gov/atr/public/9300.pdf
Reforms to the Merger Review Process at the
Commission (issued February 16, 2006),
available at http://www.ftc.gov/os/2006/02/
mergerreviewprocess.pdf
61

Case Index
U.S. Department of Justice Cases
Case Chapter(s)
United States v. Aetna Inc. and The Prudential Insurance Co. of America, (N.D.
Tex., filed June 21, 1999), 64 Fed. Reg. 44,946 (Aug. 18, 1999), 1999-2 Trade
Cas. (CCH) ¶ 72,730, materials available at http://www.usdoj.gov/atr/
cases/indx142.htm
Competitive Effects
(
Unilateral Effects)
United States v. Alcan Inc., Alcan Aluminum Corp., Pechiney, S.A., and Pechiney
Rolled Products, LLC, (D.D.C., filed Sept. 29, 2003), 69 Fed. Reg. 33,406 (June
15, 2004), 2005-1 Trade Cas. (CCH) ¶ 74,720, materials available at

http://
www.usdoj.gov/atr/cases/alcan0.htm
Entry
Arch Wireless, Inc. and Metrocall Holdings, Inc., press release available at
http://www.usdoj.gov/atr/public/press_releases/2004/206339.htm
Competitive Ef
fects
(Unilateral Effects)
United States v. Cargill Inc., Akzo Nobel, N.V., Akzo Nobel, Inc., and Akzo Nobel
Salt, Inc., (D.D.C., filed Apr. 21, 1997), 62 Fed. Reg. 26,559 (July 22, 1997),
1997-2 Trade Cas. (CCH) ¶ 71,893, materials available at

http://www.usdoj.
gov/atr/cases/indx108.htm
Competitive Ef
fects
(Unilateral Effects)
United States v. Central Parking Corp. and Allright Holdings, Inc., (D.D.C., filed
Mar. 16, 1999), 64 Fed. Reg. 15,795 (Apr. 1, 1999), 2000-1 Trade Cas. (CCH)
¶ 72,809, materials available at http://www.usdoj.gov/atr/cases/indx121.
htm
Entry
United States v. Cingular Wireless Corp., SBC Communications Inc., Bell South
Corp., and AT&T Wireless Services, Inc., (D.D.C., filed Oct. 25, 2004), 69 Fed.
Reg. 65,633 (Nov. 15, 2004), 2005-1 Trade Cas. (CCH) ¶ 74,721, materials
available at

http://www.usdoj.gov/atr/cases/cingular.htm
Entry
Cinram International Inc. and AOL Time Warner Inc. (2003) Ent
ry
United States v. Dairy Farmers of America, (E.D. Pa., filed Mar. 31, 2000), 65
Fed. Reg. 44,820 (July 19, 2000), 2001-1 Trade Cas. (CCH) ¶ 73,136, materials
available at

http://www.usdoj.gov/atr/cases/indx4450.htm
Market
Definition
United States v. EchoStar Communications Corp., Hughes Electronics Corp.,
General Motors Corp., and DirecTV Enterprises Inc., (D.D.C., filed Oct. 31,
2002), materials available at http://www.usdoj.gov/atr/cases/echost0.htm
Efficiencies
63

United States v. Enova Corp., (D.D.C., filed Mar. 9, 1998), 63 Fed. Reg. 33,396
(June 18, 1998), 2000-2 Trade Cas. (CCH) ¶ 72,965, materials available at
http://www.usdoj.gov/atr/cases/indx47.htm
Mark
et Definition
United States v. Florida Rock Industries, Inc., Harper Bros., Inc., Commercial
Testing, Inc., and Daniel R. Harper, (M.D. Fla., filed May 26, 1999), 64 Fed.
Reg. 32,258 (June 16, 1999), 2000-1 Trade Cas. (CCH) ¶ 72,858, materials
available at http://www.usdoj.gov/atr/cases/indx141.htm
Entry
Formica Corp. and International Paper Co., materials available at http://www.
usdoj.gov/atr/public/press_releases/1999/2174.htm, http://www.usdoj.
gov/atr/public/press_releases/1999/2177.htm
Competitive E
ffects
(Coordinated Interaction)
United States v. Franklin Electric Co., United Dominion Industries, Ltd., and
United Dominion Industries, Inc., 130 F. Supp. 2d 1025 (W.D. Wis. 2000),
materials available at http://www.usdoj.gov/atr/cases/indx221.htm
Competitive E
ffects
(Unilateral Effects),
Entry
United States v. General Dynamics Corp. and Newport News Shipbuilding Inc.,
(D.D.C., filed Oct. 23, 2001), materials available at http://www.usdoj.gov/
atr/cases/indx337.htm
En
try
United States v. Georgia-Pacific Corp. and Fort James Corp., (D.D.C., filed Nov.
21, 2000), 66 Fed. Reg. 9,096 (Feb. 6, 2001), 2002-2 Trade Cas. (CCH)
¶ 73,811, materials available at http://www.usdoj.gov/atr/cases/indx276.
htm
Competitive E
ffects
(Unilateral Effects)
Gai’s Seattle French Bakery Co. and United States Bakery (1996)
Effi
ciencies
IMC Global Inc. and Western Ag-Minerals Co. (1997)
Effi
ciencies
United States v. Imetal, DBK Minerals, Inc., English China Clays, plc, and English
China Clays, Inc., (D.D.C., filed Apr. 26, 1999), 64 Fed. Reg. 31,624 (June 11,
1999), 2000-1 Trade Cas. (CCH) ¶ 72,922, materials available at http://www.
usdoj.gov/atr/cases/indx140.htm
Entry
United States v. Ingersoll-Dresser Pump Co. and Flowserve Corp., (D.D.C., filed
Jan. 24, 2001), 65 Fed. Reg. 55,271 (Sept. 13, 2000), 2001-1 Trade Cas. (CCH)
¶ 73,154, materials available at

http://www.usdoj.gov/atr/cases/indx252.
htm
Mark
et Definition,
Competitive Effects
(Unilateral Effects), Entry
United States v. Interstate Bakeries Corp. and Continental Baking Co., (N.D. Ill.,
filed July 20, 1995), 60 Fed. Reg. 40,195 (Aug. 7, 1995), 1996-1 Trade Cas.
(CCH) ¶ 71,271, materials available at

http://www.usdoj.gov/atr/
cases/inters0.htm
Mark
et Definition,
Competitive Effects
(Unilateral Effects), Entry
United States v. Kimberly-Clark Corp. and Scott Paper Co., (N.D. Tex., filed Dec.
12, 1995), 60 Fed. Reg. 66,557 (Dec. 22, 1995), 1996-1 Trade Cas. (CCH)
¶ 71,405, materials available at

http://www.usdoj.gov/atr/cases/kimber0.
htm
Competitive E
ffects
(Unilateral Effects),
Entry
United States v. L’Oreal S.A., L’Oreal USA, Inc., and Carson, Inc., (D.D.C., filed
July 31, 2000), 65 Fed. Reg. 51,025 (Aug. 22, 2000), 2001-1 Trade Cas. (CCH)
¶ 73,256, materials available at

http://www.usdoj.gov/atr/cases/index251.
htm
En
try
Maybelline, Inc. and Cosmair, Inc. (1996)
Competitive E
ffects
(Unilateral Effects)
64

United States v. Mercy Health Services and Finley Tir-States Health Group, Inc.,
902 F. Supp. 968 (N.D. Iowa 1995), vacated, 107 F.3d 632 (8th Cir. 1997),
materials available at http://www.usdoj.gov/atr/cases/mercyh0.htm
Entry
United States v. NAT, L.C. and D.R. Partners d/b/a Donrey Media Group,
reported sub nom., Community Publishers, Inc. v. Donrey Corp., 892 F. Supp.
1149 (D. Ark. 1995), affirmed, Community Publishers, Inc. v. DR Partners, 139
F.3d 1180 (8th Cir. 1998), materials available at http://www.usdoj.gov/atr/
cases/natlca0.htm
Mark
et Definition
National Oilwell Inc. and Varco, Inc. (2005)
En
try
Nucor Corp. and Birmingham Steel Corp. (2002)
Effi
ciencies
United States v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Cal. 2004), materials
available at http://www.usdoj.gov/atr/cases/oracle.htm
Efficien
cies
PayPal, Inc. and eBay, Inc. (2002)
Effi
ciencies
United States v. Premdor Inc., International Paper Co., and Masonite Corp.,
(D.D.C. filed Aug. 3, 2001), 66 Fed. Reg. 45,326 (Aug. 28, 2001), 2002-2 Trade
Cas. (CCH) ¶ 73,737, materials available at http://www.usdoj.gov/atr/
cases/indx327.htm
Competitive E
ffects
(Coordinated Interaction)
Playbill Inc. and Stagebill Media (2002)
En
try
United States v. SBC Communications, Inc. and AT&T Corp., (D.D.C., filed Oct.
27, 2005), materials available at http://www.usdoj.gov/atr/cases/sbc2.htm,
http://www.usdoj.gov/atr/public/press_releases/2005/212407.pdf
Efficien
cies
United States v. Suiza Foods Corp. and Broughton Foods Co., (E.D. Ky., filed
Mar. 18, 1999), 64 Fed. Reg. 26,782 (May 17, 1999), 1999-2 Trade Cas. (CCH)
¶ 72,645, materials available at

http://www.usdoj.gov/atr/cases/indx122.
htm
Mark
et Definition,
Competitive Effects
(Coordinated Interaction,
Unilateral Effects)
Toppan Printing Co., Ltd. and DuPont Photomasks, Inc. (2005)
Effi
ciencies
United States v. 3D Systems Corp. and DTM Corp., (D.D.C., filed June 6, 2001),
66 Fed. Reg. 49,200 (Sept. 26, 2001), 2002-2 Trade Cas. (CCH) ¶ 73,738,
materials available at http://www.usdoj.gov/atr/cases/indx303a.htm
En
try
United States v. UPM-Kymmene Oyj, Raflatac, Inc., Bemis Co., and Morgan
Adhesives Co., 2003-2 Trade Cas. (CCH) ¶ 74,101 (N.D. Ill. 2003), materials
available at

http://www.usdoj.gov/atr/cases/upm-kymmene.htm
Mark
et Definition,
Competitive Effects
(Coordinated Interaction)
United States v. Vail Resorts, Inc., Ralston Resorts, Inc., and Ralston Foods, Inc.,
(D. Colo., filed Jan. 3, 1997), 62 Fed. Reg. 5,037 (Feb. 3, 1997), 1997-2 Trade
Cas. (CCH) ¶ 72,030, materials available at

http://www.usdoj.gov/atr/
cases/vailre0.htm
Competitive E
ffects
(Unilateral Effects)
United States v. Verizon Communications, Inc. and MCI, Inc., (D.D.C., filed Oct.
27, 2005), materials available at

http://www.usdoj.gov/atr/cases/verizon.
htm, http://www.usdoj.gov/atr/public/press_releases/2005/212407.pdf
Efficien
cies
United States v. Waste Management, Inc. and Allied Waste Industries, Inc.,
(D.D.C., filed Oct. 14, 2003), 68 Fed. Reg. 47,930 (Aug. 12, 2003), 2004-2
Trade Cas. (CCH) ¶ 74,478, materials available at

http://www.usdoj.gov/
atr/cases/wastem3.htm
Mark
et Definition,
Entry
65

Federal Trade Commission Cases
Case Chapter(s)
Advanced Drainage Systems, Inc. and Hancor Holding Corp. (2005) Entry
Air Products and Chemicals, Inc.; L’Air Liquide S.A.; and The BOC Group plc.
(2000)
Competitive Effects
(Coordinated
Interaction)
American Home Products Corp. and Solvay S.A. (1997), 62 Fed. Reg. 36,513
(July 8, 1997), materials available at

http://www.ftc.gov/opa/1997/02/
ahpsolv.htm
Entry
Arch Coal, Inc.; New Vulcan Coal Holdings, LLC; and Triton Coal Co., LLC.
(2004), 329 F. Supp. 2d 109 (D.D.C. 2004), 2004-2 Trade Cas. (CCH) ¶ 74,513,
materials available at

http://www.ftc.gov/opa/2004/04/archcoalcomp.htm
Efficiencies, Competitive
Effects (Coordinated
Interaction)
Aspen Technology, Inc. and Hyprotech, Ltd. (2004), 69 Fed. Reg. 45,063 (July 28,
2004), materials available at http://www.ftc.gov/opa/2004/07/aspen.htm
Competitive Effects
(Unilateral Effects)
The Boeing Co. and McDonnell Douglas Corp., materials available at http://
www.ftc.gov/opa/1997/07/boeing.htm
Market Definition

Carilion Health System and Centra Health, Inc. (2005)
Competitive Effects
(Unilateral Effects)
Cemex, S.A. de C.V. and RMC Group PLC, 70 Fed. Reg. 11,669 (Mar. 9, 2005),
materials available at

http://www.ftc.gov/opa/2005/02/cemex.htm
Market Definition
Cephalon, Inc. and CIMA Labs, Inc. (2004), 69 Fed. Reg. 52,270 (Aug. 25, 2004),
materials available at http://www.ftc.gov/opa/2004/08/cimacephalon.htm
Entry
Chicago Bridge & Iron Co. N.V.; Chicago Bridge & Iron Co.; and Pitt-Des Moines,
Inc. (2005), materials available at http://www.ftc.gov/opa/2005/01/cbi.htm
Competitive Effects
(Unilateral Effects),
Entry
DaVita Inc. and Gambro Healthcare, Inc. (2005), 70 Fed. Reg. 59,069 (Oct. 11,
2005), materials available at

http://www.ftc.gov/opa/2005/10/davita.htm
Market Definition,
Entry
Degussa Corp.; Degussa Aktiengesellschaft; and E.I. du Pont de Nemours & Co.
(1998), 63 Fed. Reg. 16,552 (Apr. 3, 1998), materials available at

http://www.
ftc.gov/opa/1998/03/degussa.htm
Competitive Effects
(Coordinated Interaction)
Diageo plc and Vivendi Universal S.A. (2001), 66 Fed. Reg. 66.896 (Dec. 27,
2001), materials available at http://www.ftc.gov/opa/2001/12/diageo.htm
Competitive Effects
(Coordinated Interaction)
Exxon Corp. and Mobil Corp. (1999), 64 Fed. Reg. 68,101 (Dec. 6, 1999),
materials available at

http://www.ftc.gov/opa/1999/11/exxonmobil.htm
Entry
Federal-Mogul Corp. and T&N PLC (1998), 63 Fed. Reg. 13,410 (Mar. 19, 1998),
materials available at

http://www.ftc.gov/opa/1998/03/fedmogul.htm
Entry
Federated Department Stores, Inc. and The May Department Stores Co. (2005),
materials available at

http://www.ftc.gov/opa/2005/08/federatedmay.htm
Market Definition
66

Fortune Brands, Inc. and Allied Domecq (2005)
Competitive Effects
Unilateral Effects)
General Electric Co. and Agfa-Gevaert N.V. (2003), 68 Fed. Reg. 74,582 (Dec. 24,
2003), materials available at http://www.ftc.gov/opa/2003/12/geagfa.htm
Competitive Effects
Unilateral Effects)
General Mills, Inc.; Diageo plc; and The Pillsbury Co. (2001), materials available
at http://www.ftc.gov/opa/2001/10/pillsbury.htm
Market Definition,
Competitive Effects
(Unilateral Effects)
Genzyme Corp. and Ilex Oncology, Inc. (2004), 69 Fed. Reg. 78,029 (Dec. 29,
2004), materials available at http://www.ftc.gov/opa/2004/12/genzyme.
htm
Efficiencies
Genzyme Corp. and Novazyme Pharmaceuticals, Inc. (2004), materials available
at http://www.ftc.gov/opa/2004/01/genzyme.htm
Efficiencies
Glaxo Wellcome plc and SmithKline Beecham plc (2000), 65 Fed. Reg. 82,374
(Dec. 28, 2000), materials available at http://www.ftc.gov/opa/2000/12/
skb.htm
Competitive Effects
Unilateral Effects)
Healthtrust, Inc. - The Hospital Co. and Holy Cross Health Services of Utah
(1994), 59 Fed. Reg. 38,176 (July 27, 1994), materials available at http://
www.ftc.gov/opa/predaw/F95/healthtrust-2.htm
Entry
Lafarge S.A.; Blue Circle Industries PLC; Blue Circle North America, Inc.; and
Blue Circle, Inc. (2001), 66 Fed. Reg. 34,682 (June 29, 2001), materials
available at

http://www.ftc.gov/opa/2001/06/lafarge.htm
Competitive Effects
(Coordinated Interaction)
Metso Oyj and Svedala Industri AB (2001), 66 Fed. Reg. 48,145 (Sept. 18, 2001),
materials available at http://www.ftc.gov/opa/2001/09/metso.htm
Competitive Effects
(Unilateral Effects), Entry
Nestle Holdings, Inc.; Dreyer’s Grand Ice Cream Holdings, Inc.; and Dreyer’s
Grand Ice Cream, Inc. (2003), 68 Fed. Reg. 39,564 (July 2, 2003), materials
available at http://www.ftc.gov/opa/2003/06/nestle.htm
Market Definition,
Competitive Effects
(Unilateral Effects), Entry
Omnicare, Inc. and NeighborCare, Inc. (2005), materials available at http://
www.ftc.gov/opa/2005/06/omnicare.htm
Entry
Precision Castparts Corp. and Wyman-Gordon Co. (1999), 64 Fed. Reg. 62,676
(Nov. 17, 1999), materials available at http://www.ftc.gov/opa/1999/11/
pcc2.htm
Entry
Quest Diagnostics, Inc. and Unilab Corp. (2003), 69 Fed. Reg. 9,082 (Feb. 27,
2003), materials available at http://www.ftc.gov/opa/2003/02/quest.htm
Market Definition,
Competitive Effects
(Unilateral Effects)
R.J. Reynolds Tobacco Holdings, Inc. and British American Tobacco plc (2004),
materials available at http://www.ftc.gov/opa/2004/06/batrjr.htm
Competitive Effects
(Coordinated Interaction)
Rhodia; Donau Chemie AG; and Albright & Wilson PLC (2000), 65 Fed. Reg.
15,156 (Mar. 21, 2000), materials available at http://www.ftc.gov/opa/
2000/03/wsl.htm
Competitive Effects
(Coordinated Interaction)
Rite Aid Corp. and Revco D.S., Inc. (1996), materials available at http://www.
ftc.gov/opa/1996/04/riterevc.htm
Market Definition,
Competitive Effects
(Unilateral Effects)
67

Staples, Inc. and Office Depot, Inc. (1997), FTC v. Staples, Inc., 970 F. Supp. 1066
(D.D.C. 1997), materials available at http://www.ftc.gov/opa/1997/06/
stapdec.htm
Market Definition,
Entry
Swedish Match North America, Inc. and National Tobacco Co., L.P. (2000), FTC v.
Swedish Match North America, Inc., 131 F. Supp. 2d. 151 (D.D.C. 2000),
materials available at http://www.ftc.gov/opa/2000/12/swedish2.htm
Market Definition,
Entry
Tenet Health Care Systems and Slidell Memorial Hospital (2003), materials
available at http://www.ftc.gov/opa/2003/04/lahospmerger.htm
Market Definition,
Competitive Effects
(Unilateral Effects)

The Sherwin-Williams Co. and Duron, Inc. (2004), 69 Fed. Reg. 57,934 (Sept. 28,
2004), materials available at http://www.ftc.gov/bc/earlyterm/2004/08/
et040827.PDF
Entry
Thrifty Drug Stores (TCH Corp.) and PayLess Drug Stores (1994), 59 Fed. Reg.
15,736 (Apr. 4, 1994), materials available at http://www.ftc.gov/opa/
predawn/F95/thriftypayles2.htm
Market Definition
Wm. Wrigley, Jr. Co. and Altria Group, Inc. (Kraft Foods, Inc.), 70 Fed. Reg.
28,944 (May 19, 2005), materials available at

http://www.ftc.gov/os/
closings/staffclosing.htm
Entry
68