Justice Dept. – antitrust division
Overview
-mission for over 6 decades: to promote and protect the competitive process-and
the American economy-through the enforcement of antitrust laws.
-apply to virtually all industries and to every level of business including manufacturing,
transportation, distribution, and marketing.
-They prohibit a variety of practices that
restrain trade such as:
 price-fixing conspiracies
 corporate mergers likely to reduce the competitive vigor of particular markets
 predatory acts designed to achieve or maintain monopoly power.
-The Division prosecutes serious & willful violations of antitrust laws by filing criminal
suits-can lead to jail & fines.
-where criminal prosecution not
appropriate, institute a civil action
seeking court order to forbid future violations of the law & requiring steps
to remedy anti-competence effects of past violations.
-Division committed to preserve competition for the benefit of businesses& consumers
w/o imposing unnecessary costs on them.
-Division provided more guidance to the business community jointly with FTC: joint
statements of policy regarding:
health care industry
licensing of intellectual property
international operations
accelerated individual business review
mergers horizontal; non-horizontal
lowers the costs to business of complying with the law by reducing
uncertainty about the parameters of legal behavior.
saves money for both business and the gov. by helping companies to
structure & organize their operations in accordance with the law, to avoid
expensive litigation.
Horizontal Merger Guidelines
Outline:
1.) Market Definition, Measurement & Concentration
1.0 Overview
1.1 product market definition
1.2 geographic market definition
1.3 identification of firms that participate in the relevant market
1.4 calculating market shares
1.5 concentration and market shares
2.) The Potential Adverse Competitive Effects of Mergers
2.0 Overview
2.1 Lessening of competition through coordinated interaction
2.2 Lessening of competition through unilateral effects
3.) Entry Analysis
3.0 Overview
3.1 Entry Alternatives
3.2 Timeliness of entry
3.3 Likelihood of entry
3.4 Sufficiency of entry
4.) Efficiencies
5.) Failure and Exiting Assets
5.0 Overview
5.1 Failing Firm
5.2 Failing Division
Entry that is easy would be easy would be timely, likely, and sufficient in magnitude,
character and scope to defer or counteract competitive effects of concern ( in
competition)
If entry is easy (timely, likely, and sufficient) merger raises no concern
Committed entry in this section is defined as new competition that requires expenditures
of significant sunk costs of entry and exit
Agency uses a 3 step methodology to assess whether committed entry would deter or
counteract competitive effects of concern:
assesses whether entry can achieve significant market impact in a timely period
(within 2 years)
assesses whether entry would be profitable and hence likely
firms considering entry that requires significant sunk costs must evaluate
the profitability of entry on basis of long-term participation in the market
because underlying assets will be committed to market until they are
economically depreciated
given merged firms decrease output and increase price
if entry could be profitable at pre-merger prices without exceeding likely sales
opportunities
then entry is likely in response to merger
assesses whether timely and likely entry would be sufficient to return market prices to pre merger levels
through multiple entry or individual large scale entry
3.1 Entry Alternatives
An entry alternative is defined by the actions the firm must take in order to produce
and sell in the market
all phases of entry are considered: planning, designing and management;
permitting, licensing and other approvals; construction, debugging and operation
of production facilities; promotion, marketing, distribution and satisfaction of
customer testing
3.2 Timeliness of Entry
Agency will consider timely only those committed entry alternatives that can be achieved
within 2 years from initial planning to significant market impact
3.3 Likelihood of Entry
An entry alternative is likely if it would be profitable at premerger prices and if such
prices could be secured by the entrant
Entry would be unlikely if minimum viable scale is larger than the likely sales
opportunities available to entrants
Minimum viable scale is the smallest average annual level of sales that the committed
entrant must persistently achieve for profitability at premerger prices
MUS is a function of expected revenues, based upon premerger prices, and
all categories of costs associated with entry alternative, including an appropriate
rate of return on invested capital given entry could fail and sunk costs are lost
(MUS will be relatively large when fixed costs of entry are large, when FC entry are
largely sunk, when MC of production are high at low output levels and when plant
underutilized for long for a long time because of delays in achieving market acceptance)
Factors that reduce the sales opportunities available to the entrants include:
a) prospective entrant will share in an expected decline in market demand
b) exclusion of entrant from portion of market due to vertical integration
c) anticipated sales expansion by incumbents in reaction to entry (utilizes
prior irreversible investments in excess capacity)
(Also consider relative appeal, acceptability and reputation of incumbents’ and entrants’
products to the new demand)
3.4 Sufficiency of Error
Entry, although likely, will not be sufficient if, as a result of incumbent control, the
tangible and intangible assets required for entry are not adequately available for entrants
to respond to sales opportunities
The character and scope of entrants’ products must be responsive to the localized sales
opportunities
e.g. if merged firms produce differentiated products and considering a unilateral
price elevation
then entrants’ product must be a close substitute so that merged firms
cannot internalize sales loss due to price rise
4. Efficiencies
Competition usually spurs firms to achieve efficiencies internally
But mergers have the potential to generate significant efficiencies by permitting a
utilization of existing assets, enabling combined firm to achieve lower costs in producing
a given quantity and quality than either could have achieved without a merger
Merger could enhance merged firm’s ability and incentive to compete
e.g. permits 2 ineffective (high cost) competitors to become one effective (low
cost) competitor
Agency will consider only those efficiencies likely to be accomplished with
proposed merger and unlikely to be accomplished in absence of either the proposed
merger or another means of having comparable anticompetitive effects
These are termed merger-specific efficiencies
Agency will not deem efficiencies to be merger-specific if it could be presented
by practical alternatives that mitigate competitive concerns, such as divestiture
or licensing
Efficiencies are difficult to verify and quantity because much info relating to
efficiencies is uniquely in possession of merging firms
e.g. shifting production among facilities formerly owned separately
more verifiable
others such as R  D less verifiable
5. Failure and Exiting Assets
5.0 Overview
A merger is not likely to create or enhance market power or facilitate its exercise, if
imminent failure of one of the merging firms would cause assets of that firm to exit
the relevant market
5.1 Failing Firm
A merger is not likely to create, enhance, facilitate market power if:
1) allegedly failing firm would be unable to meet its financial obligations
in near future
2) not able to reorganize under Chapter 11 Bankruptcy
3) made unsuccessful good-faith efforts to elicit reasonable alternative offers
of acquisition of assets
4) absent merger, assets of failing firm would exit the market
1. Market Definition, Measurement, and Concentration
1.0 Overview
- A merger is unlikely to create or enhance market power or to facilitate its exercise unless it:
1) significantly increases concentration
2) results in a concentrated market
properly defined and measured.
Agency evaluates the likely competitive impact of a merger w/o context of economically
meaningful markets
Agency seeks to define a market in which firms could effectively exercise market
power if they were unable to coordinate their actions.(act like a monopoly)
Market definition focuses solely on demand substitution factors = possible consumer
responses.
A market is defined as a product or group of products and a geographic area in which it is
produced or sold such that a hypothetical profit-max firm (merged firms) that was the
only present and future producer or seller (monopolist) of those products in that area
likely would impose at least a “small but significant and nontransitory” increase in
price (assuming terms of sale and of all other products held constant).
A relevant market is a group of products and a geographic area that is no bigger than
necessary to satisfy this test.
To determine whether a hypothetical (merged firms) monopolist would be in a position to
exercise market power.
necessary to evaluate the likely demand responses of consumers to a price
increase.
a price increase could be made unprofitable by consumers either:
scope of product mkt.  1) switching to other products (next best alternative)
scope of geographic mkt.  2) switching to the same product produced by firms at other
locations (next best alternative)
(pp 11)
 The nature and magnitude of these 2 types of demand responses respectively determine
the scope of the product market and scope of geographic market.
-Where the hypothetical monopolist likely would price discriminate
Agency may delineate different relevant markets corresponding to each such buyer
group.
competition for sales to each such group may be affected differently by a
particular merger; evaluate demand response of each such buyer group.
-Once defined, a relevant market must be measured in terms of its:
1) participants and
2) concentration
Participants include:
-firms currently producing or selling the market’s products in the market’s
geographic area.
-may include other firms depending on their likely supply responses to a “small
but significant and non transitory price increase” (potential competition)
-a firm is viewed as a participant if in response to “small but significant nontransitory “ price increase
it would likely enter rapidly into production or sale of a market
product in a market’s area, without incurring significant sunk costs of
entry & exit.
called uncommitted entrants because their supply response would
create new production or sale in relevant market and because
production can be terminated w/o significant loss.
(probable supply responses that require entrant to incur significant sunk costs of entry and exit
are not part of market measurement, but are included in entry analysis)
If the process of market definition and market measurement identifies one or more relevant
markets in which merging firms are both participants  then merger is considered to be
horizontal.
1.1 Product Market Definition
-The Agency first defines the relevant product market w/r each of the products of
each of the merging firms (must be evaluated in context of relevant geographic market)
Agency will delineate product market to be a product or products such that a profit-max
firm that was the only present and future seller of those at least a “small but
significant non transitory” price increase
if the alternatives (in aggregate) were sufficiently attractive at their existing terms of sale, an
attempt to raise prices would result in a reduction of sales large enough that the price increase
would not prove profitable and the tentatively identified product group would prove to be too
narrow. Can price  (likely by a monopolist) be defeated by availability of substitutes.
-Agency begins with each product (narrowly defined) produced or sold by each
merging firm and asks
“what would happen if a hypothetical monopolist of that product imposed at least
a “small but significant non transitory” price increase but terms of sale of all other
products remained constant?”
if, in response to a price increase, the reduction in sales of the product would be large enough
that a hypothetical monopolist would not find it profitable to impose such a price increase
then Agency will add to the product group the product that is the next best substitute
for the merging firm’s product
(Throughout Guidelines, the term “next best substitute” refers to the alternative which, if
available in limited quantities at constant prices, would account for the greatest value of
diversion of demand in response to a “small but significant and non transitory” price increase.)
-To consider the likely reaction of buyers to a price increase, Agency looks at all relevant
evidence:
1.) evidence that buyers have shifted or have considered shifting purchases between
products in response to relative price changes.
2.) evidence that sellers base business decisions on prospect of buyer substitution
between products in response to relative price changes
3.) influence of downstream competition faced by buyers in their output mkts.
4.) timing and costs of switching products.
-The Agency generally will consider the relevant product market to be the smallest group of
products that satisfies this test. (Firms will define it broadly)
To determine objectively the effect of a “small but significant and non transitory” price
increase, Agency uses 5% .
In the case of price discrimination-charging different buyers different prices for same product
-a different analysis applies where P.D. would be profitable for a hypothetical monopolist
-Existing buyers sometimes will differ significantly in their likelihood of switching to other
products in response to a “small but…”
if hypothetical monopolist can identify and price differently to those buyers
(“targeted buyers”) who would not defeat the targeted price increase by substituting to
other products
and
if other buyers would not purchase the relevant product and resell to targeted
buyers
then hypothetical monopolist would impose a discriminatory price
increase on sale to targeted buyers.
1.2 Geographic Market Definition
-for each product market in which both merging firms participate, Agency will determine the
geographic market or markets in which the firms produce or sell
-a single firm may operate in a number of different geographic markets.
-Agency will delineate the geographic market to be a region such that a hypothetical monopolist
that was the only present or future producer of the relevant product at locations in that region
would profitably impose at least a “small but significant and non transitory” price increase.
if those locations of production outside the region were, in aggregate, sufficiently attractive at
their existing terms of sale, an attempt to raise price would result in a reduction of sales large
enough that a price increase would not prove profitable
and
tentatively identified geographic area would be too narrow.
-In defining the geographic market or markets affected by the merger
Agency will begin with the location of each merging firm and ask “what would
happen if a hypothetical monopolist of the relevant product at that point imposed at least a “small
but significant and non transitory” price increase, but the terms of sale at all other locations
remained constant?
If in response to the price increase, the reduction in sales of the product at that location would
be large enough that a hypothetical monopolist producing or selling the relevant product at the
merging firm’s location would not find it profitable to impose such a price increase.
then Agency will add location from which production is the next-best substitute for
production at the merging firm’s location.
In considering the likely reaction of buyers to a price increase, Agency will take into account
all relevant evidence:
1.) evidence that buyers have shifted or considering shifting purchases between different
geographic locations in response to relative price changes.
2.) evidence that sellers base business decisions on the prospect of buyer substitution
between different geographic locations in response to relative price changes.
3.) influence of downstream competition faced by buyers in their output mkts.
4.) timing and costs of switching suppliers
in performing successive iterations of price increase test, the hypothetical monopolist will be
assumed to pursue maximum profits in deciding whether to raise price at any or all locations
under its control.
process continues until a group of locations is identified such that a
hypothetical monopolist over that group of locations would profitably impose at least a “small
but significant non-transitory” price increase
the “smallest market” principle will be applied as it is in product definition.
In presence of price discrimination (net of transportation costs)
if a monopolist can identify and price differently to different buyers in certain areas
(“target buyers”) who would not defeat the targeted price increase 1) by substituting to
more distant sellers in response to “small…” price increase for relevant product
and
2)if buyers likely would not purchase the relevant product and resell to targeted buyers,
then
hypothetical monopolist would profitably
impose a discriminatory price increase
(Note: this arbitrage is inherently impossible for many services and where product is sold on a
delivered basis and where transportation costs are a significant % of final costs.)
1.3 Identification of firms that participate in the
Relevant Market
current producers or sellers: all that currently
produce or sell in the relevant market.
competitive significance in the relevant
market prior to the merger.
firms that participate through supply response
in addition to current producers & sellers
 Agency will identify other firms not
currently producing or selling the relevant
product in the relevant market if their
inclusion reflects probable supply
responses.
( price by merged firms would lure them in) contestable markets
 These firms are termed “uncommitted entrants”
 These supply responses must be likely to occur w/in one year and w/o the expenditure of
significant sunk costs of entry & exit, in response to a “small but significant non-transitory” price
increase (the competitive significance of supply responses that require more time or require firms
to incur significant sunk costs of entry and exit will be considered in entry analysis.)
Sunk costs are the acquisition costs of tangible and intangible assets that cannot be recovered
through redeployment of these assets outside the relevant market, i.e. costs uniquely incurred to
supply the relevant product & geographic market.
 examples of sunk costs may include market-specific investments in production
facilities, technologies, marketing (including product acceptance), R&D, regulatory
approvals & testing.
 A significant sunk cost is one that would not be recouped w/in one year of
commencement of the supply response assuming a “small” price increase.
Uncommitted supply responses may occur:
 by the switching or extension of existing assets to production or sale in relevant
market or
 by the construction or acquisition of assets that enable production or sale in relevant
market.
Shift / Extension
 depending upon the speed of that shift and extent of sunk costs incurred in shift or
extension, the potential for production substitution or extension may necessitate treating
as market participants firms that do not currently produce relevant product.
 if firm has existing assets that likely would be shifted or extended w/in one
year and w/o extensive sunk costs. (in response to “small…” price increase)
 Agency will treat as participant.
New Assets
-if new firms, or existing firms w/o closely related products or productive assets, likely
would enter into production or sale within one year w/o significance expenditure for sunk
costs.
-Agency will treat those firms as participants.
1.4 Calculating Market Shares
 Agency normally will calculate market shares for all firms (or plants) identified as
market participants.
 based on the total sales or capacity currently devoted to the relevant market together
with that which likely would be devoted to the relevant market in response to “small but
significant and nontransitory” price increase.
-in measuring a firm’s market share, the Agency will not include its sales or capacity to the
extent that the firm’s capacity is committed or profitably employed outside the relevant market.
That it would not be able to respond to increased price.
→market shares will be assigned to foreign competitors in same way they are assigned to
domestic competitors.
→if shipments from a particular country to US are st quota, market share assigned
will not exceed amount allowed under quota.
→constraining effect of a quota on importer’s ability to expand sales is relevant to
evaluation of potential adverse competitive effects.
1.5 Concentration and Market Shares
-market concentration is a function of the number of firms in a market and their respective
shares.
→HHI is calculated by summing the squares of the individual market shares of all
the participants.
→eg. a market consisting of 4 firms w/market shares of 30%, 30%, 20%, 20% has
an HHI= 2600
→HHI ranges from 10,000 (pure monopoly) to approaching ø (competitive)
→in evaluating horizontal mergers, Agency will consider both post-merger market
concentration and the increase in concentration resulting from merger.
→market concentration is a useful indicator of the likely potential competitive
effect of a merger.
→General Standards for horizontal mergers:
•post-merger HHI below 1000 – Agency regards markets as unconcentrated (no
further analysis).
•post-merger HHI between 1000 and 1800 – moderately concentrated
→mergers producing an increase in the HHI of less than 100 pts. In these
markets unlikely to have adverse competitive consequences – no further
analysis
→mergers producing an increase in HHI of more than 100 points in postmerger markets potentially raise significant competitive concerns.
•post-merger HHI above 1800- highly concentrated
→mergers producing an increase in HHI of less than 50 pts. Even in highly
concentrated markets post-merger, are unlikely to have adverse competitive
consequences – no further analysis
→mergers producing an increase in HHI are more than 50 pts in highly
concentrated markets post-merger potentially raise significant competitive
concerns (likely to create or enhance market power or facilitate its exercise)
-In some situations, market share and concentration date either understate or overstate the
firm’s competitive significance (data based on historical evidence)
→recent or ongoing changes in market may change firm’s future competitive
significance (either overstate or understate)
→the magnitude of competitive harm is greater if hypothetical monopolist can
raise price w/i relevant market by more than a “small…”
→may occur when demand substitutes are not close
substitutes
2. The Potential Adverse Competitive Effects of Mergers
2.0 Overview
→other things equal, market concentration affects the likelihood that one firm, or
a small group of firms, could successfully exercise monopoly power.
→the smaller the % of total supply that a firm controls, the more severely it must
restrict its own output in order to produce a given price increase
→less likely output restriction will be profitable
→if collective action is necessary for the exercise of market power, as # firms necessary to
control a given percentage of total supply decreases
→the difficulties and costs of reaching and enforcing an understanding w/r
to the control of that supply might be reduced.
→Market share and concentration provide a starting point
→before deciding to challenge a merger, Agency also assesses other factors that
pertain to competitive effects
→as well as entry, efficiencies and failure
2.1 Lessening of Competition Through Coordinated Interaction
→A merger may diminish competition by enabling the firms selling the relevant market
more likely, more successfully, or more completely to engage in coordinated action that
harms consumers
→coordinated interaction is comprised of actions by a group of firms that are
profitable for each of them only as a result of the accommodating reactions of the
others.
→this behavior includes to cite or express collusion, and may or
may not be lawful in and of itself.
-Successful coordinated action entails:
→reaching terms of coordination that are profitable to firms involved and
→an ability to detect and punish derivations that would undermine coordinated
action
→Detection and punishment of deviations ensure that coordinating firms find it more
profitable to adhere to terms of coordination than to pursue short-terms profits from
deviating, given costs of reprisal.
→Agency examines the extent to which post-merger market conditions are conducive to 1.
reaching terms of coordinations; 2. detecting deviations from these terms; 3. punishing such
deviations.
→The following market factors may be relevant:
•availability of key info concerning mkt. Conditions, transactions, and individual
competitors
•extent of firm and product heterogeneity
•pricing or marketing practices typical employed by firms in the market
•characteristics of buyers and sellers
•characteristics of typical transactions
→Conditions conducive to reaching terms of coordination
→firms coordinating their interactions need not reach complex terms concerning
the allocation of market output across firms or the level of market prices
→may follow simple terms such as a common price, fixed price
differentials, stable mkt. Shares, or customer or territorial
restrictions (top 28)
→terms need not perfectly achieve the monopoly outcome in order to be harmful to
consumers
(eg. may omit some mkt. participants, omit some customers, may lapse into episodic
price wars)
→Market conditions may be conducive to or hinder reaching terms of coordination:
-conducive if:
•product or firm homogeneity
•existing practices among firms such as standardization of prices or
product variables
•key info about rival firms and market
-hinder if:
•product heterogeneity
•incomplete info on prospects of rivals’ businesses
•differences in current business operations
•firm heterogeneity (differences in vertical integration)
→Conditions Conducive to detecting and punishing deviations
-where market conditions are conducive to timely detection and punishment
→firm finds it more profitable to abide by terms than to deviate
→punishment must be credible
→Where detection or punishment is likely to be slow, incentives to deviate are enhanced
and coordinated interaction is unlikely to be successful.
→Buyer characteristics and nature of the procurement process may affect incentives to
deviate
→Where large buyers engage in long-term contracting so sales covered by such
contracts can be large relative to total output of a firm, firm may have incentive to
deviate.
→successful deviation only if deviation more profitable than terms
of coordination and buyers are likely to switch suppliers.
→Sometimes coordinated interaction prevented or limited by maverick firms – greater incentive
to deviate – disruptive
→acquisition of a maverick firm is one way a merger may make a coordinated interaction more
likely, more successful, or more complete.
Eg. in a market where capacity constraints are significant for many competitors, a firm is
more likely to be a maverick the greater its excess or divertible capacity in relation to
sales or its total capacity and costs of doing so.
→firm’s incentive to deviate is greater the more the firm is able to expand its output as a
proportion of sales it would obtain if it adhered to the terms and smaller the base of sales
covered by terms of coordination
→also greater likelihood of being a maverick if it can secretly expand sales.
2.2 Lessening of Competition Through Unilateral Effects
→even if merger does not lead to coordinated interaction, merging firms may find it
profitable to alter their behavior unilaterally by elevating price and suppressing output.
→firms distinguished primarily by differentiated products
→merger between firms in a market for differentiated products may diminish
competition by enabling the merged firm to profit by unilaterally raising the price
of one or both products above premerger level
→some of sales loss due to the price rise merely will be diverted to the
product of the merged partner
→capturing lost sales through merger may take price increase
profitable even if not profitable pre-merger
→substantial unilateral price elevation in market for differentiated
products requires a significant share of sales accounted for by customers
who regard products
info on consumers’ choice provided by marketing surveys or normal course of business
documents{of the merged firms as their first and second choices.
→repositioning of non-parties’ product lines to replace lost competition through
merger unlikely (significance of sunk costs)
-So, where 1. market concentration data fall outside the safe harbor regions (Sect. 1.5), 2. the
merging firms have a combined market of at least 35% and 3. where data on product attributes
and relative product appeal show that a significant share of purchasers of one merging firm
regard the other as their 2nd choice
→then evidence that consumers would be adversely affected by merger.
Ability of rival sellers to replace lost competition→
If either of the merging firms would be replaced in buyer’s consideration by an equally
competitive seller not formerly considered, then merger not likely to lead to unilateral ↑
price.
Firms Distinguished by Their Capacities
→where products are undifferentiated and capacity distinguishes firms and shapes the
nature of their competition
→where merging firms have a combined market share of at least 35%, merged
firms may find it profitable to raise price and reduce joint output below premerger output
→lost markups on foregone sales may be out weighed by increased
price on merged base of sales.
→this unilateral effect is unlikely unless a sufficiently large # of merged firms customers would
not be able to find economical alternative supply sources
→such non-party expansion is unlikely if those firms face binding capacity
constraints that could not be relaxed w/I 2 years or if existing excess capacity is
more costly to operate than capacity currently used. (significance of sunk costs)
3. Entry Analysis
3.0 Overview
-a merger is not likely to create or enhance market power or to facilitate its exercise, if
entry into the market is so easy that market participants, after merger, either collectively
or unilaterally could not profitably maintain a price increase.
Entry that is easy would be easy would be timely, likely, and sufficient in magnitude,
character and scope to defer or counteract competitive effects of concern ( in
competition)
If entry is easy (timely, likely, and sufficient) merger raises no concern
Committed entry in this section is defined as new competition that requires expenditures
of significant sunk costs of entry and exit
Agency uses a 3 step methodology to assess whether committed entry would deter or
counteract competitive effects of concern:
assesses whether entry can achieve significant market impact in a timely period
(within 2 years)
assesses whether entry would be profitable and hence likely
firms considering entry that requires significant sunk costs must evaluate
the profitability of entry on basis of long-term participation in the market
because underlying assets will be committed to market until they are
economically depreciated
given merged firms decrease output and increase price
if entry could be profitable at pre-merger prices without exceeding likely sales
opportunities
then entry is likely in response to merger
assesses whether timely and likely entry would be sufficient to return market prices to pre merger levels
through multiple entry or individual large scale entry
3.1 Entry Alternatives
An entry alternative is defined by the actions the firm must take in order to produce
and sell in the market
all phases of entry are considered: planning, designing and management;
permitting, licensing and other approvals; construction, debugging and operation
of production facilities; promotion, marketing, distribution and satisfaction of
customer testing
3.2 Timeliness of Entry
Agency will consider timely only those committed entry alternatives that can be achieved
within 2 years from initial planning to significant market impact
3.3 Likelihood of Entry
An entry alternative is likely if it would be profitable at premerger prices and if such
prices could be secured by the entrant
Entry would be unlikely if minimum viable scale is larger than the likely sales
opportunities available to entrants
Minimum viable scale is the smallest average annual level of sales that the committed
entrant must persistently achieve for profitability at premerger prices
MUS is a function of expected revenues, based upon premerger prices, and
all categories of costs associated with entry alternative, including an appropriate
rate of return on invested capital given entry could fail and sunk costs are lost
(MUS will be relatively large when fixed costs of entry are large, when FC entry are
largely sunk, when MC of production are high at low output levels and when plant
underutilized for long for a long time because of delays in achieving market acceptance)
Factors that reduce the sales opportunities available to the entrants include:
a) prospective entrant will share in an expected decline in market demand
b) exclusion of entrant from portion of market due to vertical integration
c) anticipated sales expansion by incumbents in reaction to entry (utilizes
prior irreversible investments in excess capacity)
(Also consider relative appeal, acceptability and reputation of incumbents’ and entrants’
products to the new demand)
3.4 Sufficiency of Error
Entry, although likely, will not be sufficient if, as a result of incumbent control, the
tangible and intangible assets required for entry are not adequately available for entrants
to respond to sales opportunities
The character and scope of entrants’ products must be responsive to the localized sales
opportunities
e.g. if merged firms produce differentiated products and considering a unilateral
price elevation
then entrants’ product must be a close substitute so that merged firms
cannot internalize sales loss due to price rise
4. Efficiencies
Competition usually spurs firms to achieve efficiencies internally
But mergers have the potential to generate significant efficiencies by permitting a
utilization of existing assets, enabling combined firm to achieve lower costs in producing
a given quantity and quality than either could have achieved without a merger
Merger could enhance merged firm’s ability and incentive to compete
e.g. permits 2 ineffective (high cost) competitors to become one effective (low
cost) competitor
Agency will consider only those efficiencies likely to be accomplished with
proposed merger and unlikely to be accomplished in absence of either the proposed
merger or another means of having comparable anticompetitive effects
These are termed merger-specific efficiencies
Agency will not deem efficiencies to be merger-specific if it could be presented
by practical alternatives that mitigate competitive concerns, such as divestiture
or licensing
Efficiencies are difficult to verify and quantity because much info relating to
efficiencies is uniquely in possession of merging firms
e.g. shifting production among facilities formerly owned separately
more verifiable
others such as R  D less verifiable
5. Failure and Exiting Assets
5.0 Overview
A merger is not likely to create or enhance market power or facilitate its exercise, if
imminent failure of one of the merging firms would cause assets of that firm to exit
the relevant market
5.1 Failing Firm
A merger is not likely to create, enhance, facilitate market power if:
1) allegedly failing firm would be unable to meet its financial obligations
in near future
2) not able to reorganize under Chapter 11 Bankruptcy
3) made unsuccessful good-faith efforts to elicit reasonable alternative offers
of acquisition of assets
4) absent merger, assets of failing firm would exit the market