A report published this month by NERA Economic Consulting Group and sponsored by the U.S. Chamber of Commerce challenges the way federal regulators think about mergers and their impact on market competition and innovation.
The report, Mergers, Industries, and Innovation: Evidence from R&D Expenditure and Patent Applications, attempts to discern whether mergers have a positive or negative effect on industry-level innovation. The answer the researchers provide suggests that agencies like the Federal Trade Commission (FTC) and Department of Justice (DOJ) should refrain from pursuing broad “anti-merger” actions that are unsupported by research and likely to produce negative consequences.
Researchers discovered a positive relationship between mergers and industry-level innovation. They found no evidence that mergers produce a negative impact on innovation. On the contrary, mergers were found to produce procompetitive benefits like more industry spending on research and development, necessary for developing new products and services and improving old ones.
In examining research and development (R&D) patterns, researchers found that, on average, mergers are associated with an “increase in R&D expenditure of between $9.27 billion and $13.52 billion per year in R&D intensive industries and an increase of between 1,430 and 3,035 utility patent applications per year,” the latter of which is a sign of product innovation.
The researchers do acknowledge that mergers and company investment practices are driven by a “wide variety of factors” that can be challenging to identify. However, they also note that the relationship between merger activity, R&D expenditure and innovation is “highly robust” and cannot be easily dismissed as mere correlation. Indeed, R&D investment practices and patent applications are “directly linked” to merger activity.
Perhaps that’s part of the reason why researchers also found no evidence that innovative activity decreased between the years 2008 and 2020, a segment during which some observers argue antitrust enforcement was weak.
Another significant finding from the report is a lack of evidence that past consolidations, or the trend toward rising corporate concentration, have harmed competition. These trends either reflect temporary market fluctuations or, more often, competitive market pressures. This discovery is consistent with previous NERA research, which has found that not only is industrial concentration not associated with a decline in market competition and poor outcomes, but that it’s associated with positive outcomes including “output growth, job creation, and higher employee compensation.” In addition, industrial concentration is often a direct result of “increased market competition and entry by new firms.”
For these reasons, the researchers suggest that previous industry consolidations “should not play a role” in merger reviews beyond what’s already standard practice under agency powers. In addition, the FTC and DOJ should reassess their assumption that mergers lead to anticompetitive harm.
Mergers and acquisitions (M&A) continue to play a significant role in the American economy. Between 2011 and 2020, an average of 1,739 transactions were reported annually to the FTC and DOJ as part of the Hart-Scott-Rodino Act’s (HSR) premerger notification program. While this number may not seem extreme, each transaction typically represents billions of dollars and only acquisitions over a certain size or value are reported. Thousands of other transactions worth a significant amount go unreported each year. According to Statistica, in the last month of 2022 alone, U.S. M&A deals totaled $72.2 billion.
Despite these deals’ large price tag, most pose little threat to competition, making the FTC and DOJ’s preoccupation with them misplaced. According to the agencies’ joint Hart-Scott-Rodino Annual Report, only 2.9% of all 2020 reported transactions required a “Second Request,” calling for further agency investigation into whether the deals were anticompetitive. This rate represents a decrease of 1 percent from 2010, when the rate of second requests stood at 2 percent.
While anticompetitive deals undoubtedly still occur, they’re uncommon and don’t require expanding agency powers, overhauling merger guidelines or subscribing to naïve economic theories that promote ”big is bad.” Heavy-handed enforcement will only serve to penalize companies that play by the rules and harm consumers who rely on their goods and services. Rather, federal agencies should seek to minimize the frequency and scope of market interventions, knowing that such interventions frequently lead to unintended consequences. Bad actors can be held accountable on a case-to-case basis, using non-intrusive remedies that don’t discourage market innovation or harm industry investment practices.
The economic consensus of decades past recognized the value of mergers and the important role they play in the economy. This consensus acknowledged that mergers frequently benefit both firms and consumers.
For instance, mergers can help firms achieve economies of scale necessary for obtaining more capital. This capital can then be used to purchase more equipment, hire more workers and expand business operations. Expanded operations allow firms to decrease unit costs and pass on savings to consumers in the form of lower prices. Risk can also be spread over greater distances, insulating companies from the ups and downs of the market and the need to carry out deep cuts that can harm workers and consumers.
Mergers can also unleash creative synergies that are only possible when two companies come together and share ideas and resources. The resulting performance and efficiency gains often lead to better products and services that consumers can enjoy.
Mergers produce countless other benefits, and this study is just the latest to reveal that some of those include innovation and increased R&D spending. Regulatory agencies like the FTC and DOJ should account for these economic benefits prior to carrying out aggressive antitrust action.