Corporate Governance » Factors Driving Merger Enforcement

Factors Driving Merger Enforcement

February 10, 2014

Merger law has been primarily shaped by the Department of Justice and the Federal Trade Commission. Court decisions are rare because few merger cases are litigated to conclusion. Most mergers are resolved by consent decrees or by the parties abandoning the mergers. 

In 1968, the DOJ issued its first guidelines to help the business and legal communities understand factors they consider. After several revisions, new guidelines were issued in 2010. They specifically state that “mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.”

Market power is the ability to raise prices or reduce output without losing so much market share that the price increase is unprofitable. This concept is at the heart of the unilateral competitive effects theory, which assumes that a merger between two “differentiated products” – meaning that the products vary in many ways, including color or shape – will allow the merged party to exercise market power because consumers view the acquired product to be a close substitute for the acquiring product.

The agencies also employ a variety of econometric tools to determine if a merger of differentiated products will enable the merged entity to exercise market power. One such tool is known as the “gross upward pricing pressure index,” or GUPPI.

Companies considering a merger should review internal documents to make sure they do not contradict otherwise pro-competitive evidence. Governmental agencies have great flexibility in analyzing the anti-competitive effects of a merger.

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