Organisation for Economic Co-operation and Development
DAF/COMP/WD(2018)45
Unclassified
English - Or. English
30 May 2018
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
COMPETITION COMMITTEE
Non-price Effects of Mergers - Note by the United States
6 June 2018
This document reproduces a written contribution from the United States submitted for Item 4 of
the 129th OECD Competition committee meeting on 6-8 June 2018.
More documents related to this discussion can be found at www.oecd.org/daf/competition/non-
price-effects-of-mergers.htm.
Please contact Mr. Antonio Capobianco if you have any questions about this document
[E-mail: Antonio.Capobian[email protected]]
JT03432628
This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the
delimitation of international frontiers and boundaries and to the name of any territory, city or area.
2
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United States
1. Introduction
1. A product or service is comprised of a bundle of various attributes; these
attributes may be tangible or intangible, objective or subjective. Certain products and
services may be homogenous and fungible, and competition to satisfy consumer demand
for homogeneous products therefore occurs only on price. Many products and services,
however, have one or more unique attributes that give rise to competition based on price
and non-price factors, such as quality, reliability, durability, and method of distribution.
Consumers may thus be willing to pay more for their preferred mix of price and non-price
attributes, and competition in these non-price attributes can be a significant aspect of
market competition.
2. Competition among independent firms can produce both price and non-price
benefits to consumers. For instance, as discussed in a prior submission, superior quality
is a non-price benefit of vigorous competition, and preserving those benefits may be the
subject of competition enforcement.
1
Other non-price benefits of competition may include
longer or more convenient operating hours and more favorable contract terms, such as
financing and shipping priority.
3. Mergers often 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. Antitrust enforcement by the Federal Trade Commission or the Department
of Justice (the Agencies) is primarily directed at those mergers that are likely to create or
enhance the merged firm’s ability — either unilaterally or through coordination with
rivals — to exercise market power and thereby reduce consumer welfare. The US
Horizontal Merger Guidelines explicitly recognize non-price factors of competition,
2
and
how these elements factor into the Agencies’ merger review:
Enhanced market power can also be manifested in non-price terms and conditions
that adversely affect customers, including reduced product quality, reduced
product variety, reduced service, or diminished innovation. Such non-price effects
may coexist with price effects, or can arise in their absence. When the Agencies
1
U.S. submission on The Role and Measurement of Quality in Competition Analysis
(DAF/COMP/WD (2013)31), available at https://www.ftc.gov/sites/default/files/attachments/us-
submissions-oecd-and-other-international-competition-fora/1306qualityanalysis.pdf.
2
Non-price factors of competition may also affect market definition, especially for differentiated
products. When customers confront a range of possible substitutes, some substitutes may be closer
than others, either geographically or in terms of product attributes and perceptions. The Agencies
employ the hypothetical monopolist test to evaluate groups of products in candidate markets, and
identify a set of products that are reasonably interchangeable with a product sold by one of the
merging firms. U.S. Dep’t of Justice and the Fed. Tr. Comm’n, Horizontal Merger Guidelines §4.0
(2010), available at https://www.ftc.gov/sites/default/files/attachments/merger-
review/100819hmg.pdf (hereinafter US Horizontal Merger Guidelines).
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investigate whether a merger may lead to a substantial lessening of non-price
competition, they employ an approach analogous to that used to evaluate price
competition.
3
4. Mergers between manufacturers of close substitutes may pose a risk of increased
prices. The merged firm could, sometimes, instead reduce the quality (or the average fit
of attributes to customer preferences), which can sometimes be thought of as an increase
in the “quality-adjusted price.” When it is possible to conceptualize the impact of a
merger that may potentially affect both price and quality in terms of an adjusted price, the
usual price-centric analytical framework in the Guidelines can be employed.
5. Acquisitions may diminish innovation competition by encouraging the merged
firm to curtail its innovative efforts below the level that would prevail in the absence of
the merger. This is a type of unilateral effect that could take the form of reduced
incentives to continue with an existing product-development effort, or reduced incentive
to initiate development of new products.
4
6. Mergers may also generate efficiencies that produce non-price benefits, such as
improved quality, enhanced service, new products
5
, or stronger incentives and ability to
engage in, or increase, innovative efforts. The Agencies will not challenge a merger if
cognizable efficiencies are of a character and magnitude such that the merger is not likely
to be anticompetitive in any market. In some instances, this may include out-of-market
efficiencies that are inextricably linked with efficiencies in the relevant market.
6
In
addition, mergers that increase product variety by encouraging the merged firm to
reposition its products to be more differentiated are unlikely to be anticompetitive.
7. When evaluating the effects of a merger on innovation, the Agencies consider the
ability of the merged firm to conduct research and development more effectively.
Research and development cost savings may be substantial and yet not be legally
cognizable efficiencies if they result from anticompetitive reductions in innovative
activities.
7
2. The interplay of non-price aspects of competition and market definition
8. In some markets, the non-price factors of a product or service can help firms
distinguish their offerings and better satisfy consumer preferences. For instance, where
firms compete to deliver products to customers, travel time or distance to a distribution
center may be a key service factor as well as a basis for differences in cost. In addition,
the scale of operations and the ability to provide additional services may give a firm an
economic or competitive advantage over rivals.
3
US Horizontal Merger Guidelines §1.0.
4
US Horizontal Merger Guidelines §6.4.
5
US Horizontal Merger Guidelines §10.
6
US Horizontal Merger Guidelines footnote 14.
7
US Horizontal Merger Guidelines §10.
4
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9. These factors are relevant throughout a merger analysis. Non-price factors often
are considered by the Agencies and courts in defining the relevant market affected by the
merger.
8
A merger that may reduce incentives to provide these valuable features may lead
to a reduction in non-price competition.
9
Evidence of the extent of direct competition
between the products sold by the merger parties on non-price factors is often the same
evidence relied on to determine customer substitution relevant to the hypothetical
monopolist test.
10
3. Modeling price and non-price effects
10. For nearly all products and services, price competition is an important component
of competition; the Agencies’ analysis will always include an examination of any
potential price effects. In many cases, an examination of the merger’s potential non-price
effects will not be different from the examination of the potential price effects. In some
cases, the Agencies can conduct economic analysis or modeling to estimate probable
price effects.
11
Because non-price effects tend to be non-quantitative in nature, the
Agencies rely less on formal empirical models and more on qualitative evidence to assess
the non-price effects of a merger.
12
8
See, e.g., FTC v. Sysco Corp., 113 F.Supp. 3d 1 (D.D.C. 2015)(broadline foodservice
distribution is a relevant market for national customers that prefer suppliers with a wide selection
of products, distinct facilities, timely and reliable delivery, national pricing, and value-add services
such as menu planning.)
9
Id. at 66 (“Sysco and USF are the country’s two largest broadliners by any measure. They have
far more distribution centers, SKUs, private label products, sales representatives, and delivery
trucks than any other broadline distributor. . . . [B]ecause the proposed merger would eliminate
head-to-head competition between the number one and number two competitors in the market for
national customers, the merger is likely to lead to unilateral anticompetitive effects in that
market.”).
10
US Horizontal Merger Guidelines §§ 6.1 and 4.1.1.
11
U.S. submission on Impact Evaluation of Merger Decisions (DAF/COMP/WD(2011)58),
available at https://www.ftc.gov/sites/default/files/attachments/us-submissions-oecd-and-other-
international-competition-fora/1106impactevaluation.pdf; U.S. submission on Economic Evidence
in Merger Analysis (DAF/COMP/WP3/WD(2011)4), available at
https://www.ftc.gov/sites/default/files/attachments/us-submissions-oecd-and-other-international-
competition-fora/1102economicevidencemerger.pdf.
12
Examples of studies analyzing non-price effects of mergers include Gregory J. Werden, Andrew
S. Joskow & Richard L. Johnson, The Effects of Mergers on Price and Output: Two Case Studies
from the Airline Industry, 12 MANAGERIAL & DECISION ECON. 341 (1991); Steven Berry &
Joel Waldfogel, Do Mergers Increase Product Variety? Evidence from Radio Broadcasting, 116
Q.J. OF ECONOMICS 1009 (2001); Andrew Sweeting, The Effects of Mergers on Product
Positioning: Evidence from the Music Radio Industry, 41 RAND J. OF ECONOMICS 372 (2010);
Patrick S. Romano & David J. Balan, A Retrospective Analysis of the Clinical Quality Effects of
the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare, 18 INT’L J.
ECON. OF BUSINESS 45 (2011); B.P. Pinto & D.S. Sibley, Unilateral Effects with Endogenous
Quality, 49 REVIEW OF INDUSTRIAL ORGANIZATION 449 (2016); and K.R. Brekke, L.
Siciliani, & O.R. Straume, Horizontal Mergers and Product Quality, 50 CANADIAN J. OF
ECONOMICS 1063 (2017).
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4. Examples of markets with important non-price competitive effects
11. The Agencies routinely examine non-price elements of competition during merger
review. For instance, in markets involving differentiated products or in service markets,
competition often occurs on the basis of quality or other non-price elements that are
important to customers. The Agencies will identify any dimension of competition that
will be affected by the merger in order to assess the potential for the merger to
substantially lessen competition in any relevant market.
4.1. Hospitals
12. FTC enforcement actions involving competing hospitals typically involve
consideration of a number of non-price effects, such as investments in health information
technology, advancements in disease management, and clinical integration.
13
Hospital
systems generally compete in two interrelated stages: first, they compete for inclusion in
a health insurer’s network; second, they compete to attract patients and physician referrals
to their respective systems. In the first stage, health insurers use competition between
hospitals as leverage to negotiate better reimbursement rates (i.e., prices). This, in turn,
results in lower premiums, copayments, deductibles, and other out-of-pocket expenses. In
the second stage, competition between hospitals to attract patients typically leads to
increased quality and availability of healthcare services. Thus, hospital systems compete
on both price and quality, and mergers between close rivals may eliminate both types of
beneficial competition. When competing hospitals merge, two different kinds of adverse
effects may occur: higher prices charged to insurance companies (which may be passed
on to employers and consumers) and non-price effects such as reduced quality and
availability of services. These anticompetitive effects are larger when the merging
hospitals are closer (i.e., more intense) competitors, and when other hospitals are less
significant competitors.
13. As discussed in our prior submission on the Role and Measurement of Quality in
Competition Analysis, retrospective studies of consummated hospital mergers confirm
that mergers of significant hospital competitors can result in a reduction in important
measures of clinical quality, such as mortality or complications.
14
13
See In re Advocate Health Care Network, et al, Dkt. 9369 (complaint issued Dec. 18, 2015),
available at https://www.ftc.gov/enforcement/cases-proceedings/141-0231/advocate-health-care-
network-advocate-health-hospitals; In re Penn State Hershey Medical Center, Dkt. 9368
(complaint filed Dec. 14, 2015)(merger would eliminate incentives to continue efforts to
modernize, expand oncology services, construct new outpatient facility), available at
https://www.ftc.gov/enforcement/cases-proceedings/141-0191/penn-state-hershey-medical-
centerpinnaclehealth-system. See also FTC staff submission to Southwest Virginia Health
Authority and Virginia Dept. of Health Regarding MSHA/Wellmont Cooperative Agreement
Application 21-23 (filed Oct. 3, 2016), available at
https://www.ftc.gov/system/files/documents/advocacy_documents/submission-ftc-staff-southwest-
virginia-health-authority-virginia-department-health-
regarding/160930wellmontswvastaffcomment.pdf.
14
U.S. submission on The Role and Measurement of Quality in Competition Analysis
(DAF/COMP/WD (2013)31), available at https://www.ftc.gov/sites/default/files/attachments/us-
submissions-oecd-and-other-international-competition-fora/1306qualityanalysis.pdf. See Patrick S.
Romano & David J. Balan, A Retrospective Analysis of the Clinical Quality Effects of the
6
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14. Some hospital mergers, including those that raise competitive concerns, may yield
meaningful clinical quality improvements and cost savings that might not be possible
without the merger. Taking this into account, the analysis of a proposed merger includes a
thorough assessment of the potential benefits and efficiencies, as well as the
disadvantages and harms resulting from a reduction in competition. Those benefits are
then weighed against the likely adverse effects. In general, the Agencies may decline to
challenge transactions that might raise competitive concerns when there is compelling
evidence that the likely benefits of the transaction would be of sufficient magnitude to
offset the potential harm from lost competition. It should be noted, however, that the
greater the likelihood or magnitude of harm from a proposed merger, the more likely or
substantial any claimed benefits must be to conclude that the benefits outweigh the
harms.
4.2. Physician services
15. Competition between health care providers may involve important non-price
dimensions that benefit patients. In a recent FTC challenge to a merger of competing
physician practices, the FTC alleged that the merger would eliminate existing competition
that had resulted in both practices investing in acquiring new technology, expanding their
services and facilities, and improving patient access.
15
After a trial on the FTC’s motion
for a preliminary injunction, the district court found that, in addition to price effects, the
merger was likely to reduce non-price competition between the practices to attract
patients.
16
4.3. Health insurance
16. DOJ enforcement efforts in the health insurance industry highlight the important
role that non-price effects can play in merger analysis. In 2016, the DOJ challenged a
merger between Anthem and Cigna, the second and third largest health insurance
companies in the United States.
17
The DOJ alleged that Anthem and Cigna competed
vigorously against one another to sell commercial health insurance to national accounts.
Although Cigna could not compete with Anthem solely on price, it could compete on
price and non-price terms, which included finding innovative ways to lower its
customers’ medical costs by offering sophisticated wellness programs, providing highly
Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare, 18 INT’L J. ECON.
BUS. 45 (2011); Deborah Haas-Wilson & Christopher Garmon, Two Hospital Mergers on
Chicago’s North Shore: A Retrospective Study, 18 INT’L J. ECON. BUS. 17 (2011).
15
In re Sanford Health, Dkt. 9376 (complaint filed Jun. 22, 2017), available at
https://www.ftc.gov/enforcement/cases-proceedings/171-0019/sanford-healthsanford-
bismarckmid-dakota-clinic.
16
FTC v. Sanford Health, 1:17-cv-00133 (Dec. 15, 2017).
17
Press Release, Dep’t of Justice, Justice Department and State Attorneys General Sue to Block
Anthem’s Acquisition of Cigna, Aetna’s Acquisition of Humana (July 21, 2016), available at
https://www.justice.gov/opa/pr/justice-department-and-state-attorneys-general-sue-block-anthem-
s-acquisition-cigna-aetna-s; Complaint, United States et al. v. Anthem, Inc., and Cigna Corp., No.
1:16-cv-01493 (D.D.C. July 21, 2016), available at
https://www.justice.gov/atr/file/903111/download.
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regarded customer service, and working closely with doctors and hospitals to improve the
quality and lower the cost of care. The DOJ alleged that because the merger would
eliminate Cigna as a competitor against Anthem, it would reduce the incentive to
continue innovating with respect to—and competing on—these non-price elements of its
product offerings. The district court, blocked the merger, finding that it likely would
slow such innovation; the district court’s decision was upheld by the appellate court.
18
4.4. Integrated software systems
17. The FTC recently challenged a merger between two companies that sell dealer
management systems to new car dealerships. CDK, the leading DMS software provider,
proposed to buy Auto/Mate, a competitor with a small but growing share of the market.
19
According to the FTC’s complaint, Auto/Mate had been winning business by offering
dealers not only lower prices, but also flexible contract terms, free software upgrades and
training, high quality customer service, and modest fees to integrate third-party
applications. Dealerships benefitted from Auto/Mate’s innovative and disruptive
offerings. The complaint alleged that after the acquisition, in addition to potential price
effects, DMS providers would have less incentive to offer non-price benefits, such as
shorter contracts or faster software enhancements, to retain or gain customers. After the
Commission voted to block the deal, the parties abandoned their merger plans.
4.5. Free software products
18. The value associated with non-price product attributes can be more readily
observed when the product is offered for free, with opportunities to generate revenue
through the sale of complementary products. In United States v. H&R Block, Inc.,
20
the
Department successfully blocked the merger of two digital tax software firms even
though the target firm, TaxACT, offered many of its do-it-yourself tax preparation
products for free. The court found that the proposed merger would eliminate TaxAct’s
role in constraining prices: “Not only did TaxACT buck prevailing price norms by
introducing the free-for-all offer, which others later matched, it has remained the only
competitor with significant market share to embrace a business strategy that relies
primarily on offering high-quality, full-featured products for free with associated products
at low prices.”
21
The court also cited evidence that TaxACT’s growth strategy relied on
providing great customer service, a great product, and a great customer experience for a
much lower price, including offering products and services for free. “This type of healthy
competition benefits taxpaying consumers.”
22
18
United States, et al., v. Anthem Inc. et al., 236 F.Supp.3d 171, 231 (D.D.C. 2017); United
States, et al., v. Anthem Inc., et al., 855 F.3d 345, 362 (D.C. Cir. 2017) (“The threat to innovation
is anticompetitive in its own right.”).
19
In re CDK Global, Inc., Dkt. 9382 (complaint filed Mar. 20, 2018), available at
https://www.ftc.gov/enforcement/cases-proceedings/171-0156/cdk-global-automate-matter.
20
United States v. H&R Block, Inc., 833 F.Supp. 2d 36 (D.C. Cir. 2011).
21
833 F.Supp. 2d at xx.
22
Id. at 83.
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5. Innovation as a non-price consideration in merger review
19. Competition drives firms to innovate, and a merger may substantially lessen
competition in violation of U.S. law by reducing or eliminating innovative activity that
would result in higher quality products or greater product variety. The Agencies may
consider whether a merger is likely to diminish innovation competition by encouraging
the merged firm to curtail its innovative efforts below the level that would prevail but for
the merger
23
; the Agencies will also consider whether a merger will increase the incentive
or ability of a firm to engage in innovation competition. Innovation in the form of new
products or new competitors can also alleviate any short-run competitive concerns.
24
A
fact-based analysis of likely competitive effects takes into account changing market
conditions and likely future competition to determine whether a proposed transaction is
likely to slow, enhance, or have a neutral effect on the pace of innovation.
20. Competition-driven innovation may produce superior products, and a merger that
eliminates that competitive dynamic may deny customers the benefits of that rivalry in
the future.
25
The Agencies may consider whether a merger is likely to diminish
innovation competition by reducing the incentive for the merged firm to (1) continue with
an existing product development effort or (2) initiate development of new products.
6. Reduced incentive to continue with existing product development
21. The Agencies analyze acquisitions involving products in development to
determine whether the firm’s development efforts have, or are likely to have in the near
future, a beneficial effect on competition. This effect is most likely to occur if at least
one of the merging firms is engaging in efforts to introduce a new product that would
capture substantial revenues from the other merging firm. These cases, sometimes styled
as “potential competition” cases, focus on the merger’s effect on likely entry by one (or
both) firms.
22. The FTC has challenged many mergers between pharmaceutical manufacturers
where the merger would eliminate likely entry of a new product in development by one
manufacturer that, once launched, would take sales from a product sold by the other
merging party. The FTC has taken action to prevent a reduction in emerging competition
in mergers that would combine (1) a brand manufacturer and the likely first generic
supplier;
26
(2) an existing generic supplier and a company developing a competing
23
US Horizontal Merger Guidelines § 6.4.
24
US Horizontal Merger Guidelines § 10.
25
See, e.g., In the Matter of Otto Bock HealthCare NA, Inc., Dkt. 9378 (Dec. 20, 2017)(“Under
common ownership and without the incentive to introduce innovations to take and defend sales
from each other, Respondent Otto Bock does not have the same incentive to launch these products
on the same timeline or in the same form as Otto Bock and Freedom had independently pre-
Merger.”).
26
See, e.g., Analysis to Aid Public Comment, In the Matter of Actavis and Warner Chilcott, Dkt.
C-4414 (Sept. 27, 2013),
http://www.ftc.gov/sites/default/files/documents/federal_register_notices/2013/10/131031activisfr
n.pdf. (“Evidence, including information regarding the status of the FDA approval process for
potential suppliers of generic Loestrin 24 FE, suggests that Actavis will be the first generic
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generic product;
27
(3) two companies both developing generic products in an existing
market;
28
and (4) two companies both developing generic products in a market where
there is no generic currently available.
29
These pharmaceutical cases typically involved
the introduction of a generic product that offers significant price savings, but does not
result in marketplace innovation in the classic sense of developing something beyond
what exists today.
23. In other markets, a proposed transaction between an existing competitor and a
future entrant working on a product that customers would likely view as superior to
existing products have raised significant competitive concerns. In 2009, the FTC
challenged Thoratec Corporation’s proposed $282 million acquisition of rival medical
device maker HeartWare International, Inc., charging that the transaction would
substantially reduce competition in the U.S. market for left ventricular assist devices
(LVADs). LVADs are a life-sustaining treatment for patients with advanced heart
failure.
30
Thoratec’s HeartMart II product was the only commercial LVAD available in
the United States. Its competitor, HeartWare, was engaged in clinical trials for what
many considered to be a superior device, the HVAD. FDA approval was expected by
2012. Although the path to regulatory approval of these devices was not assured, the
Commission relied on evidence that HeartWare’s device was the most likely future
competitor to Thoratec’s HeartMate II, and other companies developing LVADs were
significantly behind in developing competitive products. The parties abandoned their
merger plans.
24. In markets with significant lead times for effective entry, an incumbent’s
acquisition of an emerging competitor may delay beneficial entry indefinitely. The
Department recently challenged Westinghouse Air Brake Technology Corporation’s
(“Wabtec”) acquisition of Faiveley. The Department alleged the transaction, as originally
structured, would have substantially lessened competition for the development,
manufacture, and sale of various freight railcar brake components. Prior to the
acquisition, acquisition-target Faiveley had formed a joint venture with another rail
equipment supplier that allowed it to bundle brake components and compete more
supplier to compete against Warner Chilcott’s branded product. Moreover, no other generic
supplier is likely to enter the market for a significant period of time. Thus, the combined firm
would likely delay the entry of Actavis’s generic version of Loestrin 24 FE or, at a minimum,
cause Actavis’s generic drug to compete less vigorously against Warner Chilcott’s branded
product, resulting in higher prices for consumers. Similarly, in the markets for Lo Loestrin FE and
Atelvia, Actavis may be the first and only generic competitor to Warner Chilcott’s branded
products for a significant period absent the Proposed Acquisition. By eliminating this potential
competition between Warner Chilcott and Actavis in each of these markets, the Proposed
Acquisition would harm U.S. consumers by substantially increasing the likelihood of higher post-
acquisition prices for Lo Loestrin FE and Atelvia.”).
27
See, e.g., In the Matter of Mylan, N.V., Dkt. C-4590 (July 27, 2016).
28
See, e.g., In the Matter of Impax Laboratories, Inc., Dkt. C-4511 (Mar. 6, 2015).
29
See, e.g., In the Matter of Watson Pharmaceuticals Inc. and Actavis Inc., Dkt. C-4373 (Oct. 15,
2012); In the Matter of Endo Health Solutions, Inc. and Boca Life Sciences Holdings, LLC, Dkt.
C-4430 (Jan. 30, 2014); In the Matter of Mylan Inc. and Agila Specialties Global Pte. Ltd., Dkt. C-
4413 (Sept. 26, 2013).
30
In the Matter of Thoratec Corp., Dkt. 9339 (July 30, 2009).
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effectively with the two large incumbents, one of which is Wabtec. In addition, Faiveley
had developed its own control valve, which is the most highly-engineered,
technologically-sophisticated component in a freight car brake system. With that
capability, Faiveley could more directly compete with the incumbents—even though full
commercialization and approval was likely seven years off. The transaction would have
also eliminated future competition for control valves by preventing Faiveley’s entry into
this market, and would have thus maintained a century-old duopoly between Wabtec and
its only other control valve rival. To remedy these concerns, the companies agreed to
divest Faiveley’s entire U.S. freight car brakes business to a court-approved buyer.
31
25. The outcome of this analysis will very much depend on how certain and timely
entry would be without the merger, and the evidence may not be clear-cut. In 2015, the
Commission challenged the merger of Steris Corporation and Synergy Health, alleging
that the merger would significantly reduce future competition in regional markets for
sterilization of products using radiation, particularly gamma or x-ray radiation. At the
time of the merger, only Steris and one other company provided contract gamma
sterilization services in the U.S., while Synergy had a plan to open new plants to provide
x-ray sterilization services, an alternative to gamma radiation. The FTC alleged that the
merger would eliminate likely future competition between Steris’s gamma sterilization
facilities and Synergy’s planned x-ray sterilization facilities, thus depriving customers of
an alternative sterilization service and additional competition. The district court denied
the FTC’s motion for a preliminary injunction based on a different view of what the
evidence showed about the likelihood that Synergy would open new U.S. facilities to
provide contract x-ray sterilization services.
32
7. Reduced incentive to initiate development of new products
26. Where both firms are engaged in product development a merger may reduce
competition even though neither party has a commercially available product, because
both firms are among only a few likely entrants into a future market. In future markets
the merging firms each have established research and development efforts, and have
taken steps to develop a product, but commercial entry is still some time off. A merger
that eliminates existing incentives to continue innovation efforts could lead to fewer
products or innovative features being introduced, reducing future price and non-price
competition in a future market.
27. Current competition between firms in product markets characterized by a high
degree of innovation may be indicative of future competition between the firms. In 2013,
two of the world’s largest semiconductor manufacturing equipment makers, Applied
Materials and Tokyo Electron, announced a merger that would combine the two leading
firms that possessed the necessary knowhow, resources, and ability to develop and supply
31
United States v. Westinghouse Air Brake Technologies Corp., No.1:16-cv-02147 (D.D. C. 2017
filed Oct. 26, 2016), available at https://www.justice.gov/atr/case/us-v-westinghouse-air-brake-
technologies-corp-et-al.
32
FTC v. Steris Corp., 133 F. Supp. 3d 962, 966 (N.D. Ohio 2015) (FTC failed to show that
Synergy probably would have entered the U.S. contract sterilization market by building one or
more x-ray facilities within a reasonable period of time).
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high-volume non-lithography semiconductor equipment.
33
The DOJ conducted an
extensive investigation that found that the existing competitive overlap between specific
equipment offered by the two firms was emblematic of a broader competition to develop
new equipment. Existing competition indicated that each firm had the “building blocks,”
the appropriate collection of assets and capabilities, necessary to be successful developers
of new equipment.
34
As a result, the DOJ had substantial concerns that the merger would
diminish competition to develop equipment for the manufacture of next-generation
semiconductors. In 2015, Applied Materials and Tokyo Electron announced they were
abandoning the merger after the DOJ informed them that their proposed remedy was
inadequate.
35
28. In certain industries, a small number of large integrated global firms engage in
research and development across a broad range of products, and compete in specific
product lines based on those innovative efforts. A merger between two of these
competitors may slow the rate of innovation by reducing spending on overlapping
research projects that would support innovation competition in existing and emerging
markets. In 2016, the DOJ challenged a merger between Halliburton and Baker Hughes
that would have combined two of the three largest oilfield services companies in the
United States and the world, eliminating important head-to-head competition in markets
for more than twenty products or services used for on- and offshore oil exploration and
production in the United States.
36
Halliburton, Baker Hughes, and Schlumberger
comprised the “Big Three” in the industry, and they possessed unrivaled research and
innovation capabilities. The DOJ alleged that because of plans to eliminate expenditures
on overlapping research projects, the merger would end competition between Halliburton
and Baker Hughes to develop and bring to market “game changing” or “disruptive” new
technologies. The firms abandoned their merger soon after the DOJ filed suit.
37
33
Antitrust Div., Congressional Submission: FY 2017 Performance Budget 44 (2016), available at
https://www.justice.gov/jmd/file/821001/download.
34
Nicholas Hill, et al., Economics at the Antitrust Division 2014-2015: Comcast/Time Warner
Cable and Applied Materials/Tokyo Electron, 47 Rev. Ind. Or. 425, 433 (2015).
35
Press Release, Dep’t of Justice, Applied Materials Inc. and Tokyo Electron Ltd. Abandon
Merger Plans After Justice Department Rejected Their Proposed Remedy (April 27, 2015),
available at https://www.justice.gov/opa/pr/applied-materials-inc-and-tokyo-electron-ltd-abandon-
merger-plans-after-justice-department.
36
Press Release, Dep’t of Justice, Justice Department Sues to Block Halliburton’s Acquisition of
Baker Hughes (April 6, 2016), available at https://www.justice.gov/opa/pr/justice-department-
sues-block-halliburton-s-acquisition-baker-hughes; Complaint, United States v. Halliburton Co.
and Baker Hughes, Inc., No. 1:16-cv-00233-UNA (D. Del. April 6, 2016), available at
https://www.justice.gov/opa/file/838651/download.
37
Press Release, Dep’t of Justice, Halliburton and Baker Hughes Abandon Merger After
Department of Justice Sued to Block Deal (May 1, 2016), available at
https://www.justice.gov/opa/pr/halliburton-and-baker-hughes-abandon-merger-after-department-
justice-sued-block-deal.
12
│ DAF/COMP/WD(2018)45
NON-PRICE EFFECTS OF MERGERS - NOTE BY THE UNITED STATES
Unclassified
8. Innovation efficiencies
29. A merger of two innovative firms may lead to an increase in innovative activity
relative to the status quo, and these merger-specific efficiencies may outweigh the
potential for harm due to an elimination of competition between them. Section 10 of the
Horizontal Merger Guidelines discusses how to treat innovation efficiencies:
When considering the effects of a merger on innovation, the Agencies consider the
ability of the merged firm to conduct research and development more effectively.
Such efficiencies may spur innovation but not affect short-term pricing. The
Agencies also consider the ability of the merged firm to appropriate a greater
fraction of the benefits resulting from its innovations. Licensing and intellectual
property conditions may be important to this enquiry, as they affect the ability of
a firm to appropriate the benefits of its innovation. Research and development
cost savings may be substantial and yet not be cognizable efficiencies because
they are difficult to verify or result from anticompetitive reductions in innovative
activities.
30. Sometimes, reduced incentives to innovate may not be a cause for competitive
concern if the merger increases the merged firm’s ability to conduct R&D more
successfully. For instance, the Commission closed its investigation of a consummated
merger of two large pharmaceutical companies after concluding that, on balance, the
merger was likely to be procompetitive by speeding up on-going efforts at each firm to
develop the first drug to treat Pompe disease a rare, often fatal, disease affecting infants
and children.
38
38
See FTC News Release, “FTC Closes its Investigation of Genzyme Corporation’s 2001
Acquisition of Novazyme Pharmaceuticals, Inc.,” (Jan. 13, 2004), available at
https://www.ftc.gov/news-events/press-releases/2004/01/ftc-closes-its-investigation-genzyme-
corporations-2001.
