December 11, 2019

Antitrust: Regulators Aren’t Just Worried About Your Arch-Rival

Hertz & Avis. . .Coke & Pepsi. . .  Red Sox & Yankees. . . BoJack Horseman & Mr. Peanutbutter. .  . When you think about your competitors, it’s natural to think about your arch-rival. Since that’s the case, it’s no surprise that many companies argue that their deals don’t raise antitrust concerns because they don’t involve their most formidable competitor.  A recent post on the FTC’s “Competition Matters” blog says that isn’t necessarily how the FTC’s Bureau of Compeition sees it. Here’s an excerpt:

For any merger involving direct competitors – firms that are actively bidding against one another or vying for the same customers – the key question is whether the elimination of competition between the merging parties increases opportunities for anticompetitive unilateral or coordinated conduct in the post-merger market. While removal of the closest competitor likely eliminates the most significant source of competitive pressure on the merging firm, the Bureau’s analysis does not end merely because the merging parties are not each other’s most intense rivals.

Instead, the Bureau routinely examines mergers that do not involve the two closest competitors in a market because a merger that removes a close (though not closest) competitor also may have a significant effect on the competitive dynamics in the post-merger market—that is, it too may “substantially lessen competition” in violation of Section 7.

This is consistent with the discussion in the Horizontal Merger Guidelines § 6.1 regarding competition between differentiated products, and is especially true if the acquired firm plays the role of a disruptor or innovator in the market. These firms often ‘punch above their weight,’ having an out-sized impact on market dynamics despite a small market share.

The blog goes on to identify two recent cases in which transactions involving smaller competitors were challenged – including the Otto Bock/Freedom Innovations transaction, a completed deal which the FTC ordered to be unwound last month.

John Jenkins