The Horizontal Merger Efficiency Fallacy

Mark Glick, Gabriel Lozada, Pavitra Govindan and Darren Bush
Additional contact information
Mark Glick: University of Utah
Gabriel Lozada: University of Utah
Pavitra Govindan: University of Utah
Darren Bush: University of Houston Law Center

No inetwp212, Working Papers Series from Institute for New Economic Thinking

Abstract: The Department of Justice and Federal Trade Commission Merger Guidelines (the "Merger Guidelines"), including the much improved latest revision in 2023 (the "New Merger Guidelines"), have continued to perpetrate what we call in this paper the horizontal merger efficiency fallacy. The fallacy arises because in the Guidelines the term "efficiencies" has become unmoored from its foundations in economic theory and has been reduced to the business school construct of cost savings. We show that cost savings can only be considered universally socially beneficial by acceptance of what is termed "the Consumer Welfare Standard" (antitrust) or "the surplus theory of welfare" (economics), a theory that has been discredited and abandoned by welfare economists. In economic theory, efficiency means Pareto Efficiency. We explore the various attempts to tether the cost savings definition of efficiency to Pareto Efficiency and explain why these attempts have failed. We conclude that there is no sound way to theoretically reconcile cost savings with the economic meaning of efficiencies. We then move beyond the efficiency fallacy and show how modern welfare economics can be used to integrate Congressional antitrust goals into the New Merger Guidelines. This requires abandoning the unsupported "standard deduction" for efficiencies and replacing it with an evidence-based assessment of how a specific merger under review potentially impacts Congressional antitrust goals. This change renders the present efficiency rebuttal section of the New Merger Guidelines superfluous, and we provide specific reasons why this section as currently drafted is flawed and should be jettisoned.

Keywords: Antitrust; Efficiency; Consumer Welfare; Merger Regulation; Merger Guidelines (search for similar items in EconPapers)
JEL-codes: D4 D6 L4 L5 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2023-08-24
New Economics Papers: this item is included in nep-com, nep-hpe and nep-reg
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4566274 First version, 2023 (text/html)

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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp212

DOI: 10.36687/inetwp212

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