Sometimes you simply can’t win. In the case of the Federal Trade Commission’s FTC’s recently released draft of merger guidelines, this may literally be the case as the two guidelines seem to give contradictory suggestions for mitigating anticompetitive behavior. This issue was first pointed out in the American Consumer Institute’s comments on the proposed guidelines.
At a time when the FTC is already facing accusations of having overly onerous merger reviews, blatant contradictions in new guidelines are not helping their case. When addressing the ability for customers to switch between firms, the FTC seems to indicate that making this process both harder and easier increases the likelihood of an anticompetitive market. This is either sloppy writing on the FTC’s part or a blatant attempt at creating a “no-win” scenario for firms, not a good look, whichever way you cut it.
The FTC’s guidelines are supposed to provide clarity about how mergers are evaluated for anti-competitiveness. Each guideline provides indicators that Commission regulators use to decide when litigation is necessary. However, whether the courts accept these indicators is a different story, especially when glaring contradictions can be found in guidelines 3 and 7.
Examining each respectively, guideline 3 pertains to the potential for a merger to increase the risk of coordination between firms, which could create artificial price setting and other consumer harms (not that the FTC evaluates based on consumer harm). A list of primary and secondary factors is given, including prior attempts at coordination, elimination of maverick companies, market transparency, etc. Amongst these is an indicator that a market may be susceptible to this kind of anti-competitive arrangement when “customers find it relatively easy to switch between suppliers.”
Keeping this in mind, we skip to guideline 7, which pertains to mergers that may entrench a firm into a dominant market position or extend that dominance. Again, a list of indicators is given that can inform bureaucrats on whether a certain market is more susceptible to entrenchment. Amongst these are the switching costs, which are costs associated with customers switching between suppliers. This indicator is nearly verbatim to the one found in guideline 3, however, it signals a market may be prone to anticompetitive mergers if customers find it harder to switch between suppliers, not easier, as is the case in guideline 3. An increased switching cost would make it harder for new entrants to gain customers from a dominant firm, decreasing competition, according to the FTC.
It’s clear from this description that “ease of switching” in guideline 3 mirrors the switching costs in guideline 7. If a firm attempted to comply with guideline 7 by decreasing switching costs, it may end up in the ire of guideline 3 instead. This clear “no-win” scenario could explain why the FTC decided not to use slightly different variations of the same term for both guidelines.
Whether made in error or with ill intent, the FTC does not come away from this unscathed. Corrections to the FTC’s reasoning or wording are needed for these guidelines to be taken seriously. Though courts are not obligated to adhere to these guidelines when evaluating the FTC’s litigations, blatant contradiction in official guidelines undermines the legitimacy of an important American institution. If guidelines can be interpreted as sloppy or ill-conceived, they lose their value as a guide for firms to remain in good standing with the law. For the sake of good antitrust enforcement and clear regulation, let’s cut the contradiction.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.