Federal Trade Commission Issues Proposed Changes To the Horizontal Merger Guidelines

April 21, 2010


On April 20, 2010, the US Federal Trade Commission (“FTC”) released proposed revisions[1] to the Horizontal Merger Guidelines[2] (“Guidelines”). Developed jointly with the Department of Justice, the proposed Guidelines incorporate a number of noteworthy revisions: the Guidelines significantly raise the concentration thresholds at which mergers are considered to warrant greater scrutiny; they deemphasize the role of market definition; and they place greater reliance on economic models in mergers involving differentiated products.


On September 22, 2009, FTC Chairman Jon Leibowitz and Assistant Attorney General Christine Varney announced[3] that the antitrust agencies would hold public workshops to consider revisions to the 1992 Horizontal Merger Guidelines.[4] With “the bulk of the [Horizontal Merger] Guidelines … well over seventeen years old,” Chairman Leibowitz indicated that “the time has come” to “demystify the process and provide more accurate guidance than practitioners and the courts have been getting from the Guidelines.”[5] Those seventeen years since the last significant revision “mark the longest interval between … Guidelines updates since the Department [of Justice] first issued Merger Guidelines in 1968.”[6] In her remarks, Assistant Attorney General Varney noted the importance of “explor[ing] whether and how the Agencies should update the Guidelines in light of changes in “economic learning, the development of [Section 7] case law and agency practice,”[7] and whether the Guidelines “accurately and clearly describe current agency practice.”[8]

In conjunction with this announcement, the Agencies issued a call for public comment on a variety of topics, including: (i) the overall method of analysis used by the Agencies to review horizontal mergers; (ii) whether the use of more direct forms of evidence of competitive effects should trump presumptions and inferences of harm based on market structure; (iii) whether market definition is a necessary step in identifying and alleging competitive effects; (iv) how to best identify, measure, and explain a merger’s potential for creating unilateral market power; (v) how to implement the hypothetical monopolist SSNIP test; (vi) whether the Guidelines should adopt a “power-buyer” defense; (vii) whether the Guidelines’ efficiencies discussion should maintain the current distinction between fixed and marginal cost savings; and (viii) whether the Guidelines accurately capture the Agencies’ consideration of the non-price effects of mergers, including the effects of mergers on innovation.[9]

During the months following their announcement, the Agencies held five workshops to solicit input. Participants included a number of experts in the field, including Rich Parker and Tim Muris, co-chairs of O’Melveny & Myers’ Antitrust and Competition practice group. Tim Muris also submitted comments on the proposed Guidelines during the drafting process, which were later revised and incorporated into an article co-authored by Bilal Sayyed, a Counsel at O’Melveny and Myers.[10]

Overview of Revisions 

The proposed Guidelines include a number of significant revisions to the 1992 Guidelines, including:

HHI Thresholds — Section 5.3 of the proposed Guidelines adjusts upwards the concentration thresholds (measured by the Herfindahl-Hirschman Index, or “HHI”) used to determine when mergers merit closer scrutiny. Under the proposed Guidelines, a market with an HHI below 1500 is considered unconcentrated, a market with an HHI between 1500 and 2500 is considered moderately concentrated, and a market with an HHI above 2500 is considered highly concentrated. Mergers in unconcentrated markets and mergers that produce an increase in the HHI of less than 100 points will generally require no further analysis. Mergers in moderately concentrated markets that produce an increase in the HHI of more than 100 points potentially raise concerns. Mergers in highly concentrated markets that produce an increase in the HHI between 100 and 200 points potentially raise concerns, while mergers that produce an increase in the HHI above 200 points raise a presumption of market power. It is important to note that despite the significant changes in the HHI thresholds, the proposed Guidelines indicate that market shares and concentration levels are less important in unilateral effects cases (i.e., cases that involve differentiated products).

Sources of Evidence — Section 2.2 outlines the sources of evidence the Agencies will consider when reviewing the competitive effects of a merger. This addition provides welcome clarity to the Guidelines. For example, Section 2.2.2 highlights and attempts to rehabilitate the importance of customer evidence, which was largely ignored by the federal court in United States v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Cal. 2004).

Market Definition — Section 4 of the proposed Guidelines includes a clear articulation that market definition is not necessarily an “up-front” requirement.[11] Instead, Section 4 states that direct evidence (e.g., evidence of head-to-head competition, natural experiments, and actual effects) will assume a greater role in determining whether a proposed market definition is plausible. Section 6 of the proposed Guidelines (“Unilateral Effects”) suggests that market definition may be unnecessary in unilateral effects cases; although the proposed Guidelines do not use this phrase, in effect, the merged firms are the market.

Unilateral Effects Analysis — Section 6 of the proposed Guidelines significantly expands the discussion of factors considered in unilateral effects analysis, incorporating subsections on “Pricing of Differentiated Products,” “Bargaining and Auctions,” “Capacity and Output for Homogenous Products,” and “Innovation and Product Variety.” Of particular interest are Section 6.1 (“Pricing of Differentiated Products”) and Section 6.4 (“Innovation and Product Variety”). Section 6.1 provides greater insight into the framework used in assessing unilateral effects, including the introduction of the words “upward pricing pressure.”[12] This section notes that the Agencies may attempt to quantify the price effects of a merger through the use of economic models, but that they “do not treat merger simulation evidence as conclusive in itself, and they place more weight on whether their merger simulations consistently predict substantial price increases than on the precise prediction of any single simulation.” Section 6.4 also explicitly recognizes the important relationship between competition and innovation, and the incentive of the merged firm to innovate.[13]

Efficiencies — Section 10 of the proposed Guidelines includes revisions that are worth noting. First, Section 10 states that “Projections of efficiencies may be viewed with skepticism, particularly when generated outside of the usual business planning process.” Although it is not entirely clear what the Agencies mean by “outside of the usual business planning process,” it may suggest that the Agencies are skeptical of efficiencies projections developed in conjunction with lawyers, economists, and other consultants well after the decision to merge has been made. Second, footnote 12 adds the following sentence, which indicates the Agencies may be less hostile towards fixed cost savings in certain circumstances: “Efficiencies relating to costs that are fixed in the short term are unlikely to benefit customers in the short term, but can benefit customers in the longer run, e.g., if they make new product introduction less expensive.”

Additional Topics — The proposed Guidelines also introduce a number of additional concepts, including a section on the ability of large or powerful buyers to constrain prices (Section 10 – “Powerful Buyers”), a section on monopsony power (Section 12 – “Mergers of Competing Buyers”), and a section on the potential effects arising from minority ownership (Section 13 – “Partial Acquisitions”).

Outstanding Issues

Although the proposed Guidelines generally are helpful in that they make the Agencies’ current practices and procedures more transparent, some of the revisions cause further confusion and raise a number of questions, including:

Economic Models — Section 6 of the proposed Guidelines (“Unilateral Effects”) discusses the economic models used for evaluating the price effects of mergers in unilateral cases, including a reference to a model that evaluates “upward pricing pressure.” The Agencies do not appear to adopt formally the upward pricing pressure test outlined by Joseph Farrell and Carl Shapiro, now the chief economists at the Agencies, in their November 2008 paper titled “Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition.” However, the quoted reference leaves unclear the status of that methodology in the proposed Guidelines.

In a similar vein, the diversion ratio analysis in Section 6 relies on a static Bertrand model. Do the Agencies intend to enshrine this model as the mode of analysis when assessing unilateral effects, or will they apply it only after assessing the facts and realities of a particular industry to see whether application of the model is appropriate?

Coordinated Effects — Section 7 of the proposed Guidelines states: “Coordinated interaction can involve the explicit negotiation of a common understanding of how firms will compete or refrain from competing. . . . Coordinated interaction also can involve a similar common understanding that is not explicitly negotiated, as well as parallel accommodating conduct not pursuant to a prior understanding.” The distinction between these two concepts is not explained. Perhaps this language is meant to distinguish between so-called “tacit collusion” and “conscious parallelism”?

Power Buyers — Section 8 of the proposed Guidelines is helpful in that it states: “Powerful buyers are often able to negotiate favorable terms with their suppliers. Such terms may reflect the lower costs of serving these buyers, but they also can reflect price discrimination in their favor.” However, the Agencies have not provided any elaboration of how or in what circumstances “power buyers” might constrain the merged parties’ prices. Additional guidance in this area would be welcome.

Public Comment Period

Interested parties may submit comments on the proposed Guidelines to the FTC during a 30-day public comment period that ends on May 20, 2010.


The proposed Guidelines are the most recent in a series of revisions since the Guidelines were first adopted. Current agency practice reflects both the additional experience gained from hundreds of investigations since 1992 and the further development of economic knowledge. Similar developments motivated the Guidelines’ revisions in 1982 (incorporating a substantial body of new economic learning), in 1992 (incorporating directly the concept of unilateral effects and revising the analysis of entry), and in 1997 (advancing the treatment of efficiency claims). Incorporating the best of the Agencies’ recent learning and experience into the Guidelines will help them remain relevant into the next decade.

[1] HORIZONTAL MERGER GUIDELINES FOR PUBLIC COMMENT (APRIL 20, 2010) available at http://www.ftc.gov/os/2010/04/100420hmg.pdf.

[2] 1992 DEPARTMENT OF JUSTICE AND FEDERAL TRADE COMMISSION HORIZONTAL MERGER GUIDELINES (APRIL 8, 1997) available at http://www.ftc.gov/bc/docs/hmg080617.pdf.

[3] Press Release, Federal Trade Commission and Department of Justice to Hold Workshops Concerning Horizontal Merger Guidelines (September 22, 2009), available at http://www.ftc.gov/opa/2009/09/mgr.shtm.

[4] 1992 DEPARTMENT OF JUSTICE AND FEDERAL TRADE COMMISSION HORIZONTAL MERGER GUIDELINES (APRIL 8, 1997), available at http://www.ftc.gov/bc/docs/hmg080617.pdf.

[5] Jon Leibowitz, Chairman, Federal Trade Commission, Introduction of Philip Lowe and Announcement of Joint FTC/DOJ Project to Modernize the Horizontal Merger Guidelines at 2-3 (September 22, 2009), available at http://www.ftc.gov/speeches/leibowitz/090922mergerguideleibowitzremarks.pdf.

[6] Christine Varney, Assistant Attorney General, Antitrust Division, Department of Justice, Merger Guidelines Workshops at 1 (September 22, 2009), available at http://www.justice.gov/atr/public/speeches/250238.pdf.

[7] Id. at 4.

[8] Id.

[9] See generally, HORIZONTAL MERGER GUIDELINES: REQUEST FOR PUBLIC COMMENT (September 22, 2009), available at http://www.ftc.gov/bc/workshops/hmg/hmg-questions.pdf. See also Carl Shapiro, Deputy Assistant Attorney General, Antitrust Division, Department of Justice, Updating the Merger Guidelines: Issues for the Upcoming Workshops (November 12, 2009), available at http://www.justice.gov/atr/public/speeches/251858.pdf

[10] Timothy J. Muris and Bilal Sayyed, Three Key Principles for Revising the Horizontal Merger Guidelines, THE ANTITRUST SOURCE (April 2010).

[11] Section 4 states: “Market definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition. . . . The Agencies’ analysis need not start with market definition.”

[12] Section 6.1 states: “Adverse unilateral price effects can arise when the merger gives the merged entity an incentive to raise the price of a product previously sold by one merging firm and thereby divert sales to products previously sold by the other merging firm, boosting the profits on the latter products. . . . In some cases, where sufficient information is available, the Agencies assess the value of diverted sales, which can serve as an indicator of the upward pricing pressure on the first product resulting from the merger.”

[13] Section 6.4 states: “The Agencies may consider whether a merger is likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger. That curtailment of innovation could take the form of reduced incentive to continue with an existing product-development effort or reduced incentive to initiate development of new products.”