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Efficiencies in antitrust analysis: a view from the middle of the road.

Abstract

While antitrust scholars continue to debate the goals of antitrust law, including the role of efficiencies in antitrust analysis, these discussions typically recognize that antitrust law does and should consider efficiencies, particularly efficiencies that lead to lower consumer prices. This paper provides a review of the "efficiencies debate" and the economics literature that evaluates efficiencies to assess whether the analysis of efficiencies in antitrust cases should be changed significantly. Our review finds that current antitrust law does a reasonable job of balancing the potentially conflicting policy objectives of promoting social efficiencies and protecting consumers from the adverse effects of anticompetitive practices. As a result, we conclude that only modest change in current antitrust policy is appropriate. Specifically, we recommend (as is consistent with some existing policies) that parties asserting an efficiency rationale for their conduct should bear the burden of proof, that a rule of reason analysis should be used, that all efficiencies (not just variable cost savings) should be recognized, and that limited equity issues should be considered. We conclude that antitrust law is not well suited for addressing tangential social policy problems.

Keywords

efficiencies, economies of scale, vertical integration

Introduction

Some antitrust scholars, such as Judge Robert Bork, have argued that "[t]he whole task of antitrust can be summed up as the effort to improve allocative efficiency without impairing productive efficiency so greatly as to produce either no gain or a net loss in consumer welfare," (1) where "consumer welfare" is used by Bork to mean what economists usually call "social welfare" (consumer plus producer surplus). (2) However, other scholars have reached very different conclusions. For example, after an extensive review of the legislative history, Robert Lande concludes that "Congress passed the antitrust laws to further economic objectives, but primarily objectives of a distributive rather than an efficiency nature. In other words, Congress was concerned principally with preventing 'unfair' transfers of wealth from consumers to firms with market power." (3) In particular, Lande points out that both his and Bork's review of the legislative history found numerous references to concerns about consumers paying monopolistic prices, (4) which Lande views as evidence of a Congressional concern about the transfer of wealth between consumers and monopolists (and thus a concern for "consumer welfare" that is defined more narrowly by excluding "producer surplus"). (5) Nonetheless, Lande does recognize that the legislative history of the Sherman Act "does repeatedly praise corporate productive efficiency and recognize[s] that free competition leads to efficient competitors. The productive efficiency of free competition was especially encouraged when gains were passed on to consumers.... Congress wanted to pass a law ... which hampered productive efficiency as little as possible." (6)

Others have agreed with Lande's view that Bork overstates the importance of efficiencies as a motivating force underlying the passage of antitrust laws by ignoring the importance of other Congressional objectives. For example, Kenneth Elzinga writes: "A reading of the congressional debates on the Sherman and Clayton Acts reveals no single thread of efficiency weaving together the whole of the fabric. The record does show efficiency was to be a central goal of antitrust, but not the only one." (7) Among the non-efficiency goals of antitrust that have been identified by some scholars are the promotion of small business, creation of entrepreneurial opportunity, encouragement of local control over business, prevention of industrial concentration, the reduction of political influence of large firms, and the promotion of individual liberty. (8)

More recently, Gregory Werden has advanced a somewhat different perspective on the focus of antitrust law, asserting that that the primary goal of antitrust law is the promotion of the competitive process, not the promotion of consumer or social welfare. (9) However, he nonetheless recognizes that the analysis of efficiencies is relevant because "enhancing efficiency is part of the competitive process." (10)

In sum, while there is substantial debate over Congress' intent when it passed antitrust laws, all of the discussions indicate some Congressional concern about preserving efficiencies, particularly efficiencies that lead to lower consumer prices. As a result, it is not surprising that when implementing the antitrust statutes, courts and the antitrust agencies have recognized that it is appropriate to consider efficiencies. Specifically, courts have commented that antitrust laws are, at least in part, motivated by a desire to promote efficiency. (11) Similarly, the antitrust agencies specifically consider efficiencies, particularly efficiencies that lead to lower consumer prices. (12)

While there appears to be a consensus that antitrust law should consider efficiencies, there remains a serious debate about whether court decisions and enforcement efforts by the antitrust agencies correctly weigh efficiencies and consumer interests. While some argue that antitrust law is giving too little weight to efficiencies and thus is preventing the realization of socially important efficiencies, (13) others counter by arguing that antitrust law is giving speculative efficiencies too much weight. (14)

This article provides an analysis of the "efficiencies debate" with an eye toward assessing whether the role of efficiencies in antitrust law should be changed and, if so, what types of changes would be improvements. (15) As is explained more fully below, there is ample economic evidence that certain types of firm conduct can lead to significant costs savings (efficiencies) that are socially beneficial. As a result, there is a sound basis for embracing antitrust policies that promote competitive processes that lead to static and dynamic efficiencies. Moreover, review of merger and non-merger antitrust law suggests that current antitrust law, by protecting the competitive process, not only does a fairly good job of promoting social efficiencies, but it does so without significantly sacrificing consumer welfare or total social welfare. While our review finds that current antitrust law does a reasonable job of balancing the potentially conflicting policy objectives of promoting social welfare and consumer welfare, we conclude by offering modest policy recommendations.

Efficiency: Introduction to the Economic Concept

Types of Efficiencies

There are many types of efficiencies. Economists often differentiate between "static efficiencies" and "dynamic efficiencies." Static efficiencies are concerned with the most efficient combination of resources at a given point in time. One type of static efficiency is "productive efficiency," which is present when no more output could be produced with existing technology, given the quantity of inputs used. In more technical terms, it involves producing at the lowest point on the technically feasible cost curve. A second type of static efficiency is "allocative efficiency," which is present when economic resources are allocated to the most valued uses. Failure to allocate resources correctly means that there are "dead weight losses," such that society could produce more valuable output by reallocating resources.

"Dynamic efficiencies" involve the improvement in productive efficiency over time. These improvements may be reflected in lower production costs for producing a given output ("process efficiencies") or in the ability to produce higher quality products ("product innovation"). As is discussed below, economists have been concerned with identifying market relationships that lead to higher levels of productivity with the same or lower levels of investment.

The concept of "innovation" is related to, but somewhat different than, the concept of dynamic efficiencies. In particular, innovation relates to the development of new products, technologies, or organizational structures that may increase productive efficiency. However, the promotion of innovation does not necessarily imply dynamic efficiency, since the social costs incurred in increasing productive efficiency may be too large for the innovation to improve social welfare. For example, not all new products may be worth the social resources that went into developing them and thus the investment in the innovative activity may not have been dynamically efficient (even if the innovative activity is profitable for the firm because it exploits regulations or market imperfections to insulate the firm from competition (16)).

Relative Importance of Static and Dynamic Efficiencies

Mergers and other structural changes in markets that give firms market power can make consumers better off if they lead to significant efficiencies that lower prices or provide consumers with higher quality (more cost-effective) products. Similarly, consumers may benefit from structural changes that lead to dynamic efficiencies, even if there are static inefficiencies. As a result, economists have explored the circumstances where consumers may be better off despite monopolization that leads to some dead weight losses.

Oliver Williamson was an early contributor to the economics literature that evaluates the trade-offs between static inefficiencies due to monopolization and potential cost savings associated with that monopolization. He found that the welfare effects of relatively large percentage increases in price from monopolization could be offset by relatively small percentage changes in costs. (17) In particular, he estimated that the dead weight losses associated with a 20 percent increase in prices can be offset by a 1 percent reduction in cost if the elasticity of demand is -0.5 (and by a 4 percent reduction in cost if the demand elasticity is -2.0). (18) This type of observation led some economists to argue that antitrust law could have significant unintended adverse social consequences by interfering with firm efforts to realize efficiencies. For example, Yale Brozen argued that economies of scale often are present in markets with higher concentration levels and that efforts to deconcentrate these markets would lead to significant social losses because of lost efficiencies. (19)

While one-time static efficiencies may have important effects on consumer welfare, dynamic efficiencies can be even more important. (20) For example, even if monopolization leads to a 10 percent static loss in welfare relative to a competitive market, if the monopolistic market leads to cost savings that improve welfare by 0.5 percent more per year, the monopolistic system will lead to higher welfare levels after 20 years because of the effect of compounding interest. (21)

Summary

In sum, given the theoretical literature, there is the possibility that an overly interventionist antitrust policy that focused on barring the creation of market power could hurt consumer welfare by leading to higher static and dynamic costs that in turn lead to higher prices. The following two sections review empirical studies of the economic relationships that underlie static and dynamic efficiencies to provide a factual context for the evaluation of interplay between efficiencies and current antitrust policy.

Identification and Measurement of Efficiencies

Static Efficiencies

Economists have identified and measured many different types of static efficiencies. Probably the best known sources of static efficiencies are "economies of scale," "economies of scope," and "economies of vertical integration."

1. Economies of Scale

Economies of scale are present when average total costs fall with increases in output. In some cases, average total costs fall because fixed costs (such as overhead or "set up" costs) are spread over more units. However, average total costs per unit may also fall because firms can use different technologies at larger scales that allow them to have lower costs per unit of capacity or that allow them to produce at lower average variable costs.

There is ample empirical evidence that economies of scale are present in many market contexts. (22) Examples of the types of relationships that underlie observed economies of scale include: (23)

* Economies result from the specialization of labor so that workers are able to perform certain tasks more efficiently. (24)

* Economies result from labor savings resulting from the fact that higher capacity equipment often does not require more labor than the operation of smaller capacity equipment. (25)

* Economies result from the introduction of specialized capital equipment that is not cost-effective at lower output levels. (26)

* Economies result from the fact that the incremental cost of additional units of capacity sometimes decline with the size of the unit that is being purchased. (27)

* Economies sometimes result from reductions in per unit energy costs that occur as plant size increases. (28)

* Economies result from the "economies of massed reserves," which are present because a large operation finds it less expensive per unit to invest in back up capacity to cover downtime. (29)

* Economies result from spreading fixed costs, including overhead functions, over larger volumes. (30)

There are also dynamic economies of scale that are attributable to learning by doing. Specifically, when firms learn through historical production, their production costs fall over time with increased cumulative output. (31) This implies that larger firms that have produced more output may have lower costs than smaller firms with less cumulative output.

While economies of scale are often present, this does not mean that costs fall indefinitely. To the contrary, economists have found that economies of scale often diminish as plants get larger (as reflected in the flattening of cost curves). (32) Given this, economists have developed the concept of minimum efficient scale (MES) which reflects the "smallest amount of production a company can achieve while still taking full advantage of economies of scale with regards to supplies and costs. In classical economics, the minimum efficient scale is defined as the lowest production point at which long-run total average costs (LRATC) are minimized." (33)

Not surprisingly, economists have attempted to assess the MES of firms in industries in an effort to assess how common it is for a U.S. industry to be so small that only a handful of efficient-sized competitors can survive. While a number of different approaches have been taken, (34) the core finding is that "economies of scale at the plant level do not necessitate high national concentration levels for most U.S. manufacturing industries." (35) However, this does not mean that shifts in demand (such as the decline in demand in the defense industry following the end of the cold war) or other structural characteristics of markets do not sometimes lead to circumstances where only one or a few firms are able to supply the market at MES. Moreover, when transportation costs are high, there may be regional markets for which demand is too low to support more than one or two MES operations.

2. Economies of Scope

Economies of scope are present when costs are reduced by jointly producing two or more products, rather than producing the products separately. (36) When there are significant economies of scope, a single firm that jointly produces the products will have lower costs than a group of single-product firms that produces the same output mix. Cost savings may result from the production of several different outputs because of the ability to share common capital or other inputs. The types of inputs that may be shared because of indivisibilities include fixed assets, such as production equipment and buildings, managerial expertise, sales staff, and financial ratings. (37) For example, if the demand for a single product is too weak to fully exploit economies of scale, it may be economic to jointly produce products to spread overhead and take advantage of other cost savings that accompany the production of more output on the same equipment.

While empirical research into the size of economies of scope has found some evidence of economies of scope in some industries, this research also evidences some ambiguity about the existence and magnitude of economies of scope in other industries. (38) More specifically, while empirical studies of the airline industry find strong evidence of economies of scope, (39) the results for other industries are less clear. For example, while some studies of financial services businesses found little evidence of economies of scope, (40) other studies found important economies of scope in some parts of the financial sector. (41) Similarly, there are conflicting findings in the health care industry. While Theresa I. Gonzalez concluded that there are some economies of scope, she also observed that "beyond a certain point, it is no longer economically prudent for home health agencies to provide additional types of home healthcare services." (42) Moreover, David I. Kass found that Gonzales's "conclusion differs markedly from that found in an earlier study that concluded that neither economies of scale nor economies of scope are substantial in the provision of home health services." (43)

While economies of scope may appear when a firm uses a single manufacturing plant to produce multiple products, they can also be present when a firm operates several plants that are supported by common overhead costs. Studies of multiplant operations have found evidence of cost savings, which is consistent with the presence of economies of scope (and perhaps also economies of scale). (44) Specific multiplant efficiencies that have been identified include: (45)

* Investment cost savings because of lower capital costs, improved market information, and the ability to expand incrementally in more continuous ways by coordinating production with neighboring plants. (46)

* Efficiencies in spreading overhead (such as administration or management services) across the output of multiple plants. (47)

* Efficiencies associated with spreading fixed product and process development costs across multiple plants. (48)

* Economies of scale in downstream operations, such as distribution, advertising, and marketing, that mean there are efficiencies associated with operating multiple plants. (49)

* Economies associated with operating a portfolio of plants so that the firm is better positioned to respond to peak demands, unexpected plant outages and planned refurbishment schedules. (50)

3. Economies of Vertical Integration

(a) Vertical Integration Through Ownership

Economies of vertical integration are present when costs are lowered by internalizing transactions that would otherwise be between two unrelated parties at different levels of the supply chain. (51) In particular, the integration of two levels of production that interface can lead to cost savings through improved coordination between the two steps. For example, in the production process, steel is often heated so that it can be treated in different ways. If the producer is vertically integrated into the different stages of steel production, it may be able to move the steel from one step to the next in ways that reduce the amount of reheating of the steel that is required, lowering fuel costs. (52) Similarly, vertical integration of R&D and production activities can lead to significant savings when this facilitates communication that leads to more-focused R&D efforts that better address production problems (in part because the sharing of trade secrets is less of an issue). (53)

Much of the modern literature that discusses the efficiency of vertical integration focuses on the reduction in transaction costs that occur when a firm internalizes transactions by vertically integrating. (54) One type of transactional cost saving involves the elimination of "double marginalization." As is commonly explained in microeconomic textbooks, an industry that involves firms with market power at different levels can have higher prices and lower output levels than an industry where firms are vertically integrated because of the independent addition of monopolistic margins at the different levels of the industry ("double marginalization"). (55) For example, two empirical studies have found that backward vertical integration into programming by Cable Service Operators (CSOs) removed double marginalization. (56)

While double marginalization issues can be important, there are other transactional cost savings that arise because of vertical integration. In particular, economists have pointed to reductions in the following costs: costs associated with locating a supplier, communication costs, negotiation costs, contract enforcement costs, and costs associated with uncertainties. (57)

There is a large and growing economics literature that identifies and measures transactions costs and links these costs to various forms of contracting (including vertical integration). (58) This empirical literature confirms that vertical integration can lead to significant efficiencies. For example, in 2005, Peter G. Klein surveyed this literature and found that "the transaction cost theory of the firm has had remarkable success in explaining the vertical structure of the enterprise." (59)

(b) Vertical Integration Through Contract

Economists have observed that vertical integration not only occurs through ownership, but also occurs through contractual relationships. In particular, the literature that analyses contractual relationships often focuses on the use of exclusive contracts (60) or other contractual restrictions to address "free riding" concerns. (61) For example, a manufacturer may promote its brand in ways that attract customers to retail establishments that carry their product. However, the returns to the manufacturer's promotional efforts can be undermined if the retailer can divert customers that were drawn to its store by the manufacturer's promotion to other products. (62) Similarly, manufacturers that rely on retailers to provide certain support services at the point of sale (such as the demonstration of the product) may be concerned that customers will frequent one retailer to learn about the product and buy the product at another location (allowing the second retailer to free ride on the costly sales efforts of the first retailer by selling the product at a lower price due its lower costs). (63)

Contracts that are designed to reduce free riding by assuring some level of loyalty between vertically related parties (such as manufacturers and retailers) take a variety of forms. While they may specifically require exclusivity, they may also involve controls over the conduct of one of the parties. For example, economists have argued that in some circumstances, resale price maintenance (RPM) agreements may be proposed by manufacturers to restrict free riding by retailers who do not undertake costly efforts to support the manufacturer's product on retailers who do offer these services. (64) Similarly, tying has been observed to both lead to efficiencies and to have anticompetitive effects. (65)

In a 2008 paper for the Swedish Competition Authority, Margaret Slade summarized the empirical evidence on the welfare effects of vertical restraints. She found that vertical contractual restraints led to efficiencies in some cases, and had anticompetitive effects in others. Specifically, she found that in all but three of twenty studies, privately imposed vertical restraints "benefit consumers or at least do not harm them," (66) but that "when restraints are mandated by the government, they systematically reduce consumer welfare or at least do not improve it." (67)

Dynamic Efficiencies

As is explained above, dynamic efficiencies, such as those generated by innovation, can be particularly important because low, sustained dynamic efficiency advantages can offset sizeable transitory static efficiency losses. The importance of dynamic efficiency to consumer welfare leads to the question of whether innovation, and the dynamic efficiency that may result from socially valuable innovation, will be more likely in concentrated markets where one or more dominant firms have market power. Joseph Schumpeter addressed this question, advancing the hypothesis (sometimes called the Schumpeterian hypothesis) that large-scale establishments are often more effective innovators. For example, he wrote: "What we have got to accept is that [the large-scale establishment] has come to be the most powerful engine of [economic] progress.... In this respect, perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency." (68)

A number of economists have followed up on Schumpeter's hypothesis by undertaking theoretical and empirical efforts to test a variety of more specific hypotheses about the connection between innovative activity and firm size and/or market concentration. A theoretical basis for Schumpeterian relationships between firm size/concentration and innovation includes the presence of economies of scale and scope in R&D, the ability to hedge R&D risks by supporting a portfolio of projects, lower capital costs (both because of size and the ability to fund risky R&D out of firm profits (69)), and increased returns from discoveries because of being better able to take the discovery to market. (70) However, it is also recognized that structural characteristics of markets that reduce competition may also slow innovative efforts, which may be one way in which competition expresses itself. (71)

While early empirical studies found a positive correlation between concentration and industry R&D levels or an "inverted U" relationship, (72) subsequent tests with data sets that allowed the inclusion of additional control variables that reduced the chance of spurious correlation found little evidence of this type of simple relationship. (73) Moreover, subsequent empirical studies discovered that the tests of relationships between market structure and innovative effort are complicated by difficult causality issues that are hard to unsnarl with available data. For example, it sometimes can be hard to determine whether innovation leads to higher profits or higher profits lead to innovation. (74) Perhaps more directly, it is difficult to determine if innovation leads to concentration, (75) if increased concentration leads to innovation, or if both are jointly determined by structural characteristics of the market. (76)

Merger-Related Efficiencies

1. Economic Theory: Merger Motives

Economists have identified a number of reasons why firms may merge. While the goal of obtaining or entrenching market power and the ability to achieve significant efficiencies head the list, economists recognize that there may be other possible explanations. For example, one of these alternative explanations involves the fact that in a world with incomplete information, different entrepreneurs will sometimes have very different views about the future and about the ways in which assets may be employed, leading them to different valuations of particular assets. (77) When there is a difference in valuations, an entrepreneur who places a lower value on the assets may sell them to an entrepreneur who perceives that the assets will have a higher value in a different use or in the future. As a result, assets may change hands because of "speculation" by the buyer who believes that the market value will change in ways that make the investment worthwhile. (78)

Another alternative explanation of mergers argues that mergers may be motivated by chief executive officers (CEOs) who have control over firm decisions (because of weak boards of directors) and who perceive that their compensation and stature will be increased if they expand the size of their organization. More specifically, following the seminal book by Adolf Berle and Gardner Means, (79) some economists have argued that the separation between ownership and control of firms may lead to firm decisions that favor the executives who control the firm over stockholder interests. (80)

A third explanation for mergers, which likely applies most directly to acquisitions of closely held firms, is that the merger allows the original entrepreneur to exit the business efficiently. (81) While such mergers may not lead to significant synergies between the buyer's existing business and the acquired business, they may nonetheless lead to significant dynamic efficiencies. Specifically, these transactions create "liquidity" for an entrepreneur's ownership rights by providing entrepreneurs with an "exit strategy," which makes entrepreneurial investment more attractive and thus encourages investment and growth.

2. Empirical Analysis of Merger

Empirical studies that have tested for evidence of merger efficiencies have reported mixed results. For example, Dennis Mueller, who undertook a study of European mergers, concluded:

   No consistent pattern of either improved or deteriorated
   profitability can therefore be claimed across the seven countries.
   Mergers would appear to result in a slight improvement here, a
   slight worsening of performance there. If a generalization is to be
   drawn, it would have to be that mergers have but modest effects, up
   or down, on the profitability of the merging firms in the three to
   five years following merger. Any economic efficiency gains from the
   mergers would appear to be small ... as would any market power
   increases. (82)


More recently, Alexis Jacquemin and Margaret Slade conclude: "After examining both theoretical and empirical studies, we conclude that the benefits of merger are not evident, either from the point of view of the shareholder or of society as a whole. A general proposition in favor of mergers, therefore, does not appear to be justified." (83)

Studies of the profitability of mergers that rely on accounting data regularly find that mergers do not increase the profits of the acquiring firm. For example, G. Meeks analyzed mergers from the 1960s and early 1970s. Looking at profitability, he found that "on average profitability showed a decline from the pre-merger level.... [T]he typical efficiency loss after merger is entirely consistent with the inertia of aspirations, the pursuit of a quiet life or the sacrifice of profitability to growth." (84) Similarly, in his study of U.K. mergers, A. Singh found that "in at least half the cases there is a decline in relative profitability after take-over. It is, therefore, on balance very unlikely that the reorganisation of the firms' assets which takes place through the take-over mechanism leads to a more profitable utilisation of these assets." (85)

Mixed findings appear in financial market "event studies" that focus on changes in the stock prices of firms before and after a merger announcement. While these studies typically find that the target firm's prices rise after the announcement (which isn't surprising since most firms are offered a price above the level that existed prior to the merger because the acquiring firm values the assets more than the market), the pattern for the acquiring firm is much less consistent, (86) with observed declines in the acquiring firm's stock price being more likely if one extends the event window to see what happens to the acquiring firm's stock price a year after the merger. (87)

While broad stock market and accounting-based studies rarely find significant efficiencies, efficiencies are evident when one gets into the detailed analysis that can be undertaken using case studies. For example, F.M. Scherer, Alan Beckenstein, Erich Kaufer, and R. D. Murphy report a number of cases in which horizontal mergers led to significant efficiencies. (88)

Empirical work has tended to show that mergers are more likely to lead to significant efficiencies when they are horizontal or vertical, rather than conglomerate. For example, based on a detailed analysis of the profitability of mergers that relied on line of business data, Scherer and David Ravenscrafit found that conglomerate mergers did not appear to be associated with significant efficiencies. (89) In contrast, studies of horizontal and vertical mergers have suggested that these non-conglomerate mergers may lead to significant efficiencies. (90)

Efficiencies in Antitrust Law

Efficiency Analysis in Merger Cases

Courts and the antitrust agencies recognize that mergers may be motivated by and lead to significant efficiencies. (91) For example, the Merger Guidelines state that "a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm's ability and incentives to compete, which may result in lower prices, improved quality, enhanced service, or new products." (92) Moreover, as is pointed out in the Commentary on the Horizontal Merger Guidelines, (93) "when a merged firm achieves such efficiencies, it may induce competitors to strive for greater efficiencies in order to compete more effectively," benefiting consumers. (94)

Courts have required significant evidence that associated efficiencies are significant, that the merger is required to achieve them, and that the efficiencies will benefit consumers. (95) Similarly, the antitrust agencies, under the Merger Guidelines, limit the efficiencies that they consider to "cognizable efficiencies," which are efficiencies that are merger-specific, (96) verifiable, (97) do not result from anticompetitive effects, (98) and have net benefits. (99)

Much of the burden of proof for demonstrating merger-related efficiencies is placed on the merging parties. For example, the Merger Guidelines state:

   Efficiencies are difficult to verify and quantify, in part because
   much of the information relating to efficiencies is uniquely in the
   possession of the merging firms. Moreover, efficiencies projected
   reasonably and in good faith by the merging firms may not be
   realized. Therefore, it is incumbent upon the merging firms to
   substantiate efficiency claims so that the Agencies can verify by
   reasonable means the likelihood and magnitude of each asserted
   efficiency, how and when each would be achieved (and any costs of
   doing so), how each would enhance the merged firm's ability and
   incentive to compete, and why each would be merger-specific. (100)
   (emphasis added)


Moreover, the Merger Guidelines suggest that the agencies will not accept efficiency claims without substantial proof. Specifically, the Merger Guidelines indicate that "efficiencies projected reasonably and in good faith by the merging firms may not be realized" (101) and that " [projections of efficiencies may be viewed with skepticism, particularly when generated outside of the usual business planning process." (102)

While efficiencies are considered in litigated cases and during the antitrust agencies' antitrust investigations, they are rarely determinative. Litigated merger cases have rarely turned on efficiency issues. (103) Similarly, a study of Federal Trade Commission (FTC) merger investigations found that efficiencies, while often considered, are not central to many investigations. (104) Specifically, the authors found that the FTC reaches no decision on the efficiency claims in over half of its investigations and, when it does reach a conclusion about the efficiency claim, it rejects the claim more often than it accepts the claim (e.g., the Bureau of Competition rejected 109 claims and accepted only 29 claims and the Bureau of Economics rejected 84 claims and accepted 37 claims). (105)

Courts and the antitrust agencies recognize that mergers can, and often do, lead to efficiencies. (106) However, they also recognize that mergers may not lead to significant efficiencies and that some claimed efficiencies may be obtained in a less anticompetitive way. As a result, courts and the antitrust agencies require a relatively detailed factual showing that cognizable efficiencies are present. While there is debate over whether courts and the antitrust agencies give efficiencies too much or too little weight, (107) the fundamental analytical issues that should be addressed when considering efficiencies are captured by the Merger Guidelines (and increasingly by courts, which have started embracing the Merger Guideline methodology).

Efficiencies Analysis in Monopolization Cases

While some monopolization conduct continues to be analyzed using per se standards, courts have increasingly turned to "rule of reason analysis" when evaluating monopolization. (108) For example, in the area of vertical restraints, courts now require that conduct be evaluated using a rule of reason analysis in which the "factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." (109) Similarly, in cases such as Broadcast Music, Inc. v. CBS, courts have recognized that a detailed economic analysis may be required in circumstances where horizontal arrangements that fix prices may lead to significant beneficial competitive effects (such as the ability to market a valuable product that would otherwise not be available). (110)

While the plaintiff carries the burden of demonstrating that the defendant's conduct resulted in a substantial anticompetitive effect, most courts require the defendant to bear the burden of proving that its conduct was beneficial. (111) If sufficiently sizeable benefits are established, the burden of showing that the restraint was not reasonably necessary to achieve the benefits or that its procompetitive benefit is outweighed by anticompetitive harm falls on the plaintiff. (112)

Courts have recognized a wide range of justifications for potentially anticompetitive conduct. In the context of cases involving vertical nonprice restraints, courts have often recognized that restraints that limit intraband competition may enhance interbrand competition. For example, the Supreme Court observed in Sylvania Inc. that vertical nonprice restrictions may "promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products" and that "[t]he market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition." (113) Recently in Leegin, the Court extended this reasoning to vertical price restrictions. (114) In horizontal and vertical cases, courts have accepted justifications based on increasing output, (115) creating operating efficiencies, (116) making a valuable new product available, (117) enhancing product or service quality, widening consumer choice, and other factors. (118)

With respect to defendant efforts to meet the burden of showing that there were benefits from their conduct, courts have not been shy about rejecting claims of procompetitive effects when such effects are not supported by sufficient evidence. (119) Nonetheless the Supreme Court has found that non-price restraints have "real potential to stimulate interbrand competition." (120)

Similarly, the antitrust agencies have sponsored guidelines and policy statements that recognize that certain business relationships that might appear to constrain competition in some dimensions may have procompetitive effects. Both the Antitrust Guidelines for Collaborations Among Competitors (121) and the Antitrust Guidelines for the Licensing of Intellectual Property (122) outline rule of reason analyses used to evaluate potentially monopolistic conduct. For example, in the Competitor Collaboration Guidelines, the agencies undertake a comparison of cognizable efficiencies and anticompetitive harms to determine if potential monopolistic conduct is anticompetitive. (123)

As this review implies, courts and the antitrust agencies employ efficiency analyses in monopolization cases that parallel those used in the analysis of mergers. In particular, they are willing to consider evidence that the suspect behavior benefits consumers and thus should not be found to be anticompetitive. However, as in the case of mergers, they also recognize that efficiency claims must be supported by verifiable facts and they consider whether the claimed efficiencies may be obtained in a less anticompetitive way. Again, while there is debate over whether courts and the antitrust agencies give efficiencies too much or too little weight in monopolization cases, (124) the fundamental analytical issues that should be addressed when considering efficiencies are largely captured by the current case law and Agency Guidelines.

Conclusion: A Modest Proposal

Antitrust laws are among the least precise statutes enacted by Congress. (125) As a result, antitrust law has relied heavily on judicial interpretation. Whether or not this was intended, as some have claimed, (126) this implies that antitrust law is positioned to evolve with advances in economic learning. (127) As is explained above, the incorporation of increasingly sophisticated economic analysis in antitrust law has led to a situation where antitrust law, perhaps because it is focused on the protection of the competitive process, has evolved so that today it employs rule of reason analysis that can preserve static and dynamic efficiencies. As a result, while we do not deny that there may be individual cases where there may be room for improvement, we believe that appropriate changes in antitrust law can be made through the evolution of case law. Put simply, there is no need for drastic change in the underlying statutes to promote efficiency or to make antitrust laws more stringent because efficiencies that are critical to case outcomes are assumed to be present without proof.

Nonetheless, we do believe that some modest changes may be appropriate. First, because efficiency-based explanations of firm conduct are becoming an increasingly important part of antitrust cases, we think it is becoming increasingly important to more clearly identify which party carries the burden of proof with respect to efficiency arguments. As is true for the antitrust agencies' guidelines and for some recent case law, we think that the parties asserting an efficiency rationale should bear the burden of proof. The primary reason for this is that it is typically the case that the party advancing the efficiency defense is the party that has the incentive to establish these efficiencies and has the best access to the information needed to identify and factually verify relevant efficiencies.

Second, in evaluating efficiencies, we believe that it can be important to recognize all types of efficiencies, not just saving static, short-run, variable costs. As is explained above, dynamic efficiencies can be very significant. Also, it is important to consider static reductions in all types of costs, not just short-run variable costs. While it may be true that a reduction in fixed costs may be less likely to have immediate effects on firm pricing (to the extent that firms compete by lowering prices toward short-run marginal costs), the shedding of fixed costs that lower long-run marginal costs can lead to lower prices in the long run and free up resources that might be better employed in other endeavors.

Third, as is increasingly becoming the case under the ongoing evolution of the case law, we think that the appropriate legal analysis is a multifaceted rule of reason analysis. This analysis should draw on the latest economic learning about firm strategic behavior, including marketing literature. It should also draw on a review of the institutional structure of the market, including governmental regulations that may shape firm behavior.

Fourth, while we think it is appropriate to consider some equity issues when undertaking an antitrust analysis, such as the transfer of consumer surplus from consumers to monopolists through higher prices, we believe that antitrust law is not well suited for directly addressing tangential social policy problems. Specifically, "too big to fail" issues that arise in some financial markets are better addressed by statutes and regulatory agencies that focus narrowly on the conduct and structure of financial markets. Similarly, environmental issues and the behavior of executives who oversee corporate activities should be the focus of the relevant regulatory agencies, not antitrust law.

DOI: 10.1177/0003603X15585982

Authors' Note

Respectively, Principal and Vice President, Economists Incorporated.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

(1.) Robert Bork, The Antitrust Paradox 91 (1978). This means that he excludes a concern about the transfer from consumers to monopolists because of higher prices. See also his discussion of the legislative history underlying the Sherman Act in which he argues that Congress' intent was for the Sherman Act to promote efficiency, rather than other social objectives. Robert Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & Econ. 7 (1966). For related discussions, see Phillip Areeda & Donald Turner, Antitrust Law: An Analysis of Antitrust Principles and Their Application 149 n. 2 (1980); Richard Posner, Antitrust Law: An Economic Perspective 11-18 (1976); Charles Rule, Consumer Welfare, Efficiencies and Mergers: Statement for Hearing of the Antitrust Modernization Commission "Treatment of Efficiencies in Merger Enforcement" (November 17, 2005) 5-6, available at http://govinfo.library.unt.edu/amc/ commission_hearings/merger_enforcement.htm.

(2.) "Consumer welfare is greatest when society's economic resources are allocated so that consumers are able to satisfy their wants as fully as technological constraints permit. Consumer welfare, in this sense, is merely another term for the wealth of the nation. Antitrust thus has a built-in preference for material prosperity, but it has nothing to say about the ways prosperity is distributed or used. Consumer welfare, as the term is used in antitrust, has no sumptuary or ethical component." Bork, supra note 1, at 90.

(3.) Robert Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 Hastings L.J. 65, 68 (1982) [hereinafter Lande, Wealth Transfers], For a more recent treatment that reaches the same conclusion, but includes both a review of the legislative history and a textual analysis of antitrust statutes, see Robert Lande, A Traditional and Textualist Analysis of the Goals of Antitrust: Efficiency, Preventing Theft from Consumers, and Consumer Choice, 81 Fordham L. Rev. 2349 (2013) ("Both approaches demonstrate that the overriding purpose of the antitrust statutes is to prevent firms from stealing from consumers by charging them supracompetitive prices."). For another review of the legislative history that disagrees with Bork's position, see Thomas W. Hazlett, The Legislative History of the Sherman Act Re-examined, 30 Econ. Inquiry 263, 2351 (1992).

(4.) Lande, Wealth Transfers, supra note 3, at 87. ("Judge Bork's review of the Sherman Act's legislative history conclusively demonstrates that Congress was preoccupied with the higher prices facing consumers as a result of monopolistic pricing.") Lande also points out that there was fairly explicit concern about transfers from consumers to monopolists: "As Senator Sherman pointed out in qualification of his praise for efficiency, 'It is sometimes said of these combinations that they reduce prices to the consumer by better methods of production, but all experience shows that this saving of cost goes to the pockets of the producer.'" (Lande, Wealth Transfers, supra note 3, at 91) See also John Kirkwood & Robert Lande, The Fundamental Goal of Antitrust: Protecting Consumers, Not Increasing Efficiency, 84 Notre Dame L. Rev. 191, 201 (2008) (pointing out that "Judge Bork summarized this portion of the debates eloquently: 'The touchstone of illegality is raising prices to consumers. There are no exceptions.'").

(5.) Lande, Wealth Transfers, supra note 3, at 87-89, 142-46. See also Kirkwood & Lande, supra note 4; Frank Easterbrook, Workable Antitrust Policy, 84 Michigan L. Rev. 1696, 1702-03 (1986). Lande criticizes Bork's view that the Sherman Act was focused on the promotion of total social welfare/reduction of allocative inefficiencies by pointing out that this argument ignores the fact that the allocative inefficiencies associated with monopoly (today captured in the famous "dead weight loss triangle") became well-known to economists only well after the passage of the Sherman Act. (Lande, Wealth Transfers, supra note 3, at 88-89). This led Lande to conclude that "the Sherman Act reveals a total lack of concern for allocative efficiency" (Id. at 83). While it is correct the allocative inefficiency due to the "dead weight loss" associated with monopolization was not well known at the time the Sherman Act was passed, one must also recognize (as Lande points out) that Congress "condemned trusts for raising prices and restricting output" (Id. at 88, 93) and that it is the restriction/reduction in output that causes the "dead weight loss" in simple economic models of monopoly. As a result, it may be somewhat strong to claim that there was a "total lack of concern with allocative efficiency."

(6.) Lande, Wealth Transfers, supra note 3, at 89. See also id. at 105 ("Congress wanted a competitive economy to encourage the greater efficiencies resulting from competition. Efficiency gains were particularly desired when benefits passed through directly to consumers.").

(7.) Kenneth Elzinga, The Goals of Antitrust: Other Than Competition and Efficiency, What Else Counts? 125 U. Pa. L. Rev. 1191-92 (1977). See also Louis Schwartz, Justice and Other Non-Economic Goals of Antitrust, 127 U. Pa. L. Rev. 1076 (1979) who argues that "[t]he difficult question is not whether non-economic considerations are a proper, indeed conventional, component of the antitrust calculus, but how to take them into account." George Stigler, The Origin of the Sherman Act, 14 J. Legal Stud. 1 (1985).

(8.) See, e.g., Lande, Wealth Transfers, supra note 3, at 69, citing Elzinga, supra note 7. See also Thurman Arnold, The Economic Purpose of Antitrust Laws, 26 Miss. L.J. 207, 207-08 (1955); Harlan Blake & William Jones, In Defense of Antitrust, 65 Colum. L. Rev. 377, 377-82 (1965).

(9.) See, e.g., Gregory J. Werden, Antitrust's Rule of Reason: Only Competition Matters, 79 Antitrust L.J. 713 (2014).

(10.) Id. at 758.

(11.) Courts have condemned the misallocation of resources associated with monopolization. See, e.g., Northern Pac. Ry. v. United States, 356 U.S. 1, 4 (1958). There are a few cases that hold that an act is anticompetitive only if it harms allocative efficiency and raises prices. Others have cited Bork for the relevance of consumer welfare, but they do not make it clear whether they are using "consumer welfare" in the broad sense Bork uses it, rather than in a narrower sense that focuses on consumer surplus (and does not include producer surplus). See, e.g., Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). Courts have also recognized non-efficiency objectives of antitrust law. See, e.g., United States v. Aluminum Co. of Am., 148 F.2d 416, 428-29 (2d Cir. 1945) (indicating that there are more than economic reasons to forbid monopoly, namely that "great industrial consolidations are inherently undesirable, regardless of their economic results" and that one of the purposes of antitrust laws was to "perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units."); Brown Shoe Co. v. United States 370 U.S. 294, 344 (1962) ("Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets" through the promotion of competition.).

(12.) For example, in merger analysis, the antitrust agencies consider whether "cognizable efficiencies likely would be sufficient to reverse the merger's potential to harm consumers in the relevant market, e.g., by preventing price increases in the market." U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (2010), [section] 4, http:// www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter Merger Guidelines].

(13.) Some have even recommended the repeal of all antitrust laws because of concerns about the loss of important efficiencies. Dominick. T. Armentano, Antitrust Policy: The Case for Repeal (1986). See also Dominick Armentano, Antitrust Policy: Reform or Repeal, (Cato Policy Analysis No. 21, 1983), http://www.cato.org/pubs/pas/pa021.html. ("The most rational antitrust reform would be a thorough and complete business deregulation and the immediate repeal of the antitrust laws.") See also Daniel Crane, Rethinking Merger Efficiencies, 110 Mich. L. Rev. 347 (2011) http:// www.michiganlawreview.org/assets/pdfs/110/3/crane.pdf (which suggests merger law places an asymmetrically higher burden of proof on merging parties claiming efficiencies than is appropriate).

(14.) See, e.g., Daniel Rubinfeld, On the Foundations of Antitrust Law and Economics, in How the Chicago School Overshot the Mark 57 (Robert Pitofsky ed., 2008), http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd= 2&ved=0CCYQFjAB&url=http%3A%2F%2Fwww.law.berkeley.edu%2Ffaculty%2Frubinfeldd%2FProfile%2Fpublications%2F Foundation%2520of%2520Antitrust%2520Law%2520and%2520Economics.pdf&ei=CqyyU931G5CkqAa561H4DQ&us g=AFQjCNGlogUNDTtGrITwqjTLSsN3nHLL3g.

(15.) Some commentators have argued that antitrust law should be used to address a wide variety of tangential social objectives. For example, commentators have suggested that antitrust law should protect small businesses, protect the economy against the creation of firms that are "too big to fail," and protect democratic institutions against the creation of firms with overwhelming political power. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. Pa. L. Rev. 1051 (1979) ("Such considerations as the fear that excessive concentration of economic power will foster antidemocratic political pressures, the desire to reduce the range of private discretion by a few in order to enhance individual freedom, and the fear that increased governmental intrusion will become necessary if the economy is dominated by the few, can and should be feasibly incorporated into the antitrust equation. Although economic concerns would remain paramount, to ignore these non-economic factors would be to ignore the bases of antitrust legislation and the political consensus by which antitrust has been supported."). See also J. Thomas Rosch, Commissioner, Federal Trade Commission, Implications of the Financial Meltdown for the FTC, Remarks before New York Bar Association Annual Dinner, Jan. 29, 2009, http://www.ftc.gov/public-statements/2009/01/implications-financial-meltdown-ftc. (Supporting the possibility that antitrust enforcement could address too big to fail issues, FTC Commissioner Rosch commented: "The Clayton Act is inherently prospective and the current standard prevents anticompetitive harm in its incipiency. Hence, if a merger creates a firm whose failure is likely to have a catastrophic effect on the market as a whole, because it is so integral to the market, the end result may be a substantial lessening of competition."); Jesse Markham, Lessons For Competition Law From the Economic Crisis: Can "Too Big To Fail" Trigger Useful Antitrust Intervention? (Feb. 2010), http:// works.bepress.com/jesse_markham/2; Adi Ayal, The Market for Bigness: Economic Power and Competition Agencies' Duty to Curtail It, 1 J. Antitrust Enforcement 221-46 (2013); Jonathan R. Macey & James P. Holdcroft, Jr., Failure Is an Option: An Ersatz-Antitrust Approach to Financial Regulation, 120 Yale L.J. 1368 (2011); Bernard Shull, Too Big to Fail: Motives, Countermeasures, and the Dodd-Frank Response (The Levy Econ. Inst, of Bard C., Working Paper No. 709, Feb., 2012). Moreover, the legislative history and antitrust decisions provide some support for the view that antitrust law appropriately considers broader social objectives. For example, the objective of protecting small businesses has been found in the legislative history and antitrust cases. See, e.g., Lande, Wealth Transfers, supra note 3, at 101-05, 120-21. Also, case law has sometimes considered broader social objectives when determining whether there was an antitrust violation. See, e.g., United States v. Brown University, 5 F.3d 658 (3d Cir. 1993) (the court found that an allegedly anticompetitive agreement among universities to not compete for students using financial aid offers could not be fully evaluated without considering "noneconomic justifications"). This article does not delve into these broader social objectives in any detail for three reasons. First, it is not practical, given the space constraints. Second, many of these broader social objectives do not appear to be linked to "antitrust injury" and thus (at least based on existing case law) may not be addressable by existing antitrust law. See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977) ("Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful. The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation."). Third, as others have pointed out, there are policy tools that are better than antitrust for addressing these broader social policy objectives. See, e.g., Jacqueline Bell, No Antitrust Cure-All for 'Too Big To Fail': Experts, Law 360 (Mar. 30, 2009), http://www.law360.com/articles/94528/no-antitrust-cure-all-for-too-big-to-fail-experts (quoting Andrew Gavil as stating that "The problem with trying to integrate a concern like [too-big-to-fail] with antitrust policy is that antitrust is focused on the analysis of competition. And too big to fail is not really a competition issue. The domino effect is really the problem.... I'm not sure that antitrust is the right tool."). See also Lawrence J. White, Antitrust and the Financial Sector--With Special Attention to "Too Big to Fail," presented at the Conference on the Fiftieth Anniversary of United States v. Philadelphia National Bank, NYU Law School (Nov. 15, 2013, revised Mar. 27, 2014); Brett Christophers, Banking and Competition in Exceptional Times, 36 Seattle U. L. Rev. 563 (2013); J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. Competition L. & Econ. 581-631 (2009).

(16.) For discussions related to the concept of predatory innovation, see Janusz A. Ordover & Robert D. Willig, An Economic Definition of Predation: Pricing and Product Innovation, 91 Yale L.J. 8 (1981); Gregory J. Werden, Identifying Exclusionary Conduct under Section 2: The "No Economic Sense" Test, 73 Antitrust L J. 413, 417 (2006); and Jonathan Jacobson, Scott Sher, & Edward Holman, Predatory Innovation: An Analysis of Allied Orthopedic v. Tyco in the Context of Section 2 Jurisprudence, 23 Loy. Consumer L. Rev. 1 (2010).

(17.) For an early recognition of welfare trade-offs associated with shifts from a competitive equilibrium with higher costs to a monopolistic equilibrium with lower costs, see Oliver Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Am. Econ. Rev. 18 (1968).

(18.) Id. at 22-23.

(19.) Yale Brozen, Concentration, Mergers and Public Policy 11-12 (1983).

(20.) See, e.g., F.M. Scherer & David Ross, Industrial Market Structure and Economic Performance 31 (1990).

(21.) For example, assume that the consumer welfare associated with the supply of a product is $1,000, so a 10% static loss today is $100. The twenty-year future compounded value of annual cost savings of Vi percent (0.005) would be several dollars larger ((1000) * [(1.005).sup.(20)] = $104.90).

(22.) See, e g., F.T. Moore, Economies of Scale: Some Statistical Evidence, 73 Q.J. Econ. 232 (1959); John Haldi & David Whitcomb, Economies of Scale in Industrial Plants, 75 J. Pol. Econ. 373 (1967); Karsten Junius, Economies of scale: A survey of the empirical literature (Kiel, Working Paper No. 813, 1997); Stephen Martin, Globalization and the Natural Limits of Competition, in Handbook of Competition ch. 1 (Manfred Neumann & Jurgen Weigand eds., 2013).

(23.) See Scherer & Ross, supra note 20, at 97-119.

(24.) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, ch. 1.9 (1776).

(25.) See Scherer & Ross, supra note 20, at 100.

(26.) Paul A. Samuelson & William D. Nordhaus, Economics 504-05 (1989); William A. McEachern, Economics: A Contemporary Introduction 461 (1997).

(27.) In some cases, this decline in per unit capacity costs is attributable to the fact that the cost of processing units is proportional to the surface area of the unit while the production capacity is proportional to the volume of the unit. Since volume rises disproportionately with surface area as units get larger, this implies that the cost of an incremental unit of capacity declines as units get larger. For a discussion of this point, sometimes called the "two-thirds rule," see Scherer & Ross, supra note 20, at 98-100.

(28.) Id.

(29.) E. A. G. Robinson, The Structure of Competitive Industry 26-27 (1958); James G. Mulligan, The Economies of Massed Reserves, 73 Am. Econ. Rev. 725 (1983).

(30.) See Scherer & Ross, supra note 20, at 100.

(31.) See, e.g., Kenneth Arrow, The Economic Implications of Learning by Doing, 29 Rev. Econ. Stud. 155 (1962).

(32.) See Scherer & Ross, supra note 20, at 102-06; F. M. Scherer, Alan Beckenstein, Erich Kaufer, & R. D. Murphy, The Economies of Multi-Plant Operation: An International Comparisons Study 324 (1975).

(33.) http://www.investopedia.com/terms/m/minimum_efficiency_scale.asp.

(34.) As is explained in one review of the literature, four different approaches have been used to study this issue: (1) some economists have assessed how firm profitability varies with size; (2) some have used multiple-regression studies to relate costs to output levels; (3) some have employed the "survivor test" which studies the extent to which firms of particular size levels have been sufficiently efficient to survive; and (4) some have undertaken engineering-based assessments of economies of scale on an industry-by-industry basis. Scherer & Ross, supra note 20, at 111-18.

(35.) Id. at 116. For example, survivorship studies have shown that firms of very different sizes sometimes survive in the same market. See, e.g., T. R. Saving, Estimation of Optimum Size of Plant by the Survivor Technique, 75 Q.J. Econ. (1961); Leonard W. Weiss, The Survival Technique and the Extent of Suboptimal Capacity, 72 J. Pol. Econ. 246 (1964). Also, economists have observed that firms operate plants that appear to be below MES. See, e.g., Mark J. Roberts & Dylan Supina, Output Price, Markups, and Producer Size, 40 Eur. Econ. Rev. 909 (1996); Kaye D. Evans, John Siegfried, & George Sweeney, The Economic Cost of Suboptimal Manufacturing Capacity, 56 J. Bus. 55 (1983); Leonard Weiss, Optimal Plant Size and Extent of Suboptimal Capacity, in Essays on Industrial Organization 136-41 (Robert Masson & P. David Qualls eds., 1976); Thomas J. Holmes & John J. Stevens, An Alternative Theory of the Plant Size Distribution With an Application to Trade (The National Bureau of Economic Research, Working Paper No. 15957, Apr. 2010), http://www.nber.org/papers/w15957.

(36.) William Baumol, John Panzar, & Robert Willig, Cost Concepts Applicable to Multiproduct Cases ch. 4, in Contestable Markets and the Theory of Industry Structure (1982); J.C. Panzar & Robert Willig, Economies of Scope, 71 Am. Econ. Rev. 268 (1981).

(37.) David Teece, Economies of Scope and the Scope of the Enterprise, 1 J. Econ. Behav. & Org. 223 (1980), provides a discussion of a variety of different types of economies of scope.

(38.) For example, David Teece observed that "[t]he empirical evidence on diversification is extremely sketchy." Id. at 233.

(39.) James A. Leggette & Brenda Killingsworth, An Empirical Study of Economies of Scope: The Case of Air Carriers, 7(2) Stud, in Econ. Analysis 27. 30-31 (1983, Emerald Backfiles) (found "cost complementarities," or economies of scope, in passenger and freight airline operations because of excess storage capacity and networking). Javier Gimeno & Carolyn Woo, Multimarket Contact, Economies of Scope, and Firm Performance, 43 Acad. Mgmt. J. 255, 255 (1999) (found that "[i]n the airline industry, it appears that economies of scope are strong and well understood by managers).

(40.) Gimeno & Woo, supra note 39, at 255 (found economies of scope to be "rather weak if present at all.").

(41.) Stijn Claessens & Daniela Klingebiel, Competition and Scope of Activities in Financial Services, 16 World Bank Res. Observer 24 (2001) (finding that the integrated banking model, i.e., full integration of commercial banking with other financial services, including securities markets, can offer important benefits through the potential of exploiting economies of scale and scope).

(42.) Theresa I. Gonzales, An Empirical Study of Economies of Scope in Home Healthcare, 32 HSR: Health Services Res. 322 (1997).

(43.) David I. Kass, Economies of Scope and Home Healthcare, 33 HSR: Health Services Res. 947 (1998).

(44.) See Scherer, Beckenstein, Kaufer, & Murphy, supra note 32, at 382-99.

(45.) For a discussion of many of these savings, see Scherer & Ross, supra note 20, at 120-41.

(46.) Illustrative studies that show lower debt and equity costs for larger firms include: Rudolph C. Blitz, Ben Bolch, Paul Laux, & John Siegfried, The Effect of Market Structure on the Cost of Borrowing in Issues After a Century of Federal Competition Policy 333-43 (Robert L. Wills et al., eds., 1987); S.H. Archer & L.G. Faerber, Firm Size and the Cost of Externally Secured Capital, 21 J. Fin. 69 (1966). For other discussions of how capital costs may or may not decline with firm size, see, e.g., David Ravenscraft & F.M. Scherer, Mergers, Sell-offs, and Economic Efficiency 38-44, 212-13 (1987); Oliver Williamson, Corporate Control and Business Behavior 121-30, 163-64, 176-77 (1970). In particular, as Ravenscraft and Scherer point out, large firms may not have more efficient capital allocation if internal capital markets are sufficiently bureaucratic that they do not do as good a job at investment as public markets. Id.

(47.) James S. Ang & James Wuh Lin, A Fundamental Approach to Estimating Economies of Scale and Scope of Financial Products: The Case of Mutual Funds, 16 Rev. Quantitative Fin. & Acer. 217 (2001).

(48.) James A. Leggette & Brenda Killingsworth, supra note 39.

(49.) James S. Ang & James Wuh Lin, supra note 47.

(50.) Stijn Claessens & Daniela Klingebiel, supra note 41.

(51.) Ronald Coase, The Nature of the Firm, 4 Economica 386 (1937). Oliver Williamson, The Vertical Integration of Production: Market Failure Considerations, 61 Am. Econ. Rev. 112 (1971).

(52.) Robert M. Grant, Contemporary Strategy Analysis: Text and Cases 354 (2010), https://www.google.com/?gws_rd= ssl#q=Robert+M.+Grant,+CONTEMPORARY+STRATEGY+ANALYSIS:+TEXT+AND+CASES,+(2010)&start=10.

(53.) Kenneth Arrow, Vertical Integration and Communications, 6 Bell J. Econ. 173 (1975) (discussing how it may be more efficient to communicate internally). See also Ilan Guedj, Ownership vs. Contract: How Vertical Integration Affects Investment Decisions in Pharmaceutical R&D, paper presented at European Finance Association Moscow Meetings (2005), https://www.aeaweb.org/assa/2006/0106_0800_0202.pdf.

(54.) Oliver Williamson, supra note 51.

(55.) Joseph Spengler, Vertical Integration and Antitrust Policy, 58 J. Pol. Econ. 347 (1950).

(56.) Tasneem Chipty, Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry, 91 Am. Econ. Rev. 428 (2001). David Waterman & Andrew A. Weiss, The Effects of Vertical Integration Between Cable Television Systems and Pay Cable Network, 72 J. Econometrics 357 (1996).

(57.) Dennis W. Carlton, Vertical Integration in Competitive Markets Under Uncertainty, 27 J. Indus. Econ. 189 (1979). For empirical studies on the relationship between transaction costs and vertical integration, see Marvin B. Lieberman, Determinants of Vertical Integration: An Empirical Test, 39 J. Indus. Econ. 451 (1991); Paul L. Joskow, Vertical Integration, in Handbook of Institutional Economics 319 (Claude Menard & Mary M. Shirley eds., 2005).

(58.) For statistical studies of how transaction costs vary depending on organizational forms, see, e.g., K. Monteverde & David Teece, Supplier Switching Costs and Vertical Integration in the Automohile Industry, 13 Bell J. Econ. 206 (1982); T. Palay, Comparative Institutional Economics: The Governance of Rail Freight Contracting, 13 J. Legal Stud. 265 (1984). For case studies of how transaction costs vary across organizational forms, see, e.g., Oliver Williamson, The Economic Institutions of Capitalism ch. 13 (1985); Paul Joskow, Vertical Integration and Long-term Contracts, 1 J.L. Econ. & Org. 33 (1985). Paul W. Dobson & Michael Waterson, Vertical Restraints and Competition Policy, 12 Off. Fair Trading Res. Paper 5 (December 1996).

(59.) Peter G. Klein, The Make-or-Buy Decision: Lessons from Empirical Studies, in Handbook of Institutional Economics 455 (Claude Menard & Mary M. Shirley eds., 2005).

(60.) S. I. Omstein, Resale Price Maintenance and Cartels, 30 Antitrust Bull. 401 (1985).

(61.) See following discussion of resale price maintenance (RPM) and tying: T. R. Sass, The Competitive Effects of Exclusive Dealing: Evidence From the U.S. Beer Industry, 23 Int'l J. Indus. Org. 203 (2005).

(62.) Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Constraints: Empirical Evidence and Public Policy, in Handbook of Antitrust Economics ch. 10 (Paolo Buccirossi ed., 2008).

(63.) Id.

(64.) For example, Pauline Ippolito studied litigated RPM cases in the United States between 1976 and 1982. She found collusion was a plausible factor in only thirteen percent of the cases. Efficiency rationales were plausible for "virtually all cases in the sample." P.M. Ippolito, Resale Price Maintenance: Empirical Evidence from Litigation, 34 J.L. & Econ. 263 (1988). However, others have found evidence of RPM being associated with anticompetitive activities. See, e.g., Patrick Rey, Price Control in Vertical Relations, in The Pros and Cons of Vertical Restraints, Konkurrensverket, Swedish Competition Authority 136 (2008); P. Biscourp, X. Boutin, & T. Verge, The Effects of Retail Regulations on Prices: Evidence from the Loi Galland, INSEE-DESE Discussion Paper G2008/2; C. Bonnet & P. Dubois, Inference on Vertical Contracts Between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance (2004) mimeo; C. Bonnet & P. Dubois, Non Linear Contracting and Endogenous Buyer Power Between Manufacturers and Retailers: Identification and Estimation on Differentiated Products (2007) mimeo.

(65.) Michael A. Salinger & Alexander Elbittar, White Paper on Vertical Restraints, CRC Am. Latina (May 2013).

(66.) Margaret E. Slade, The Effects of Vertical Restraints: An Evidence Based Approach, in The Pros and Cons of Vertical Restraints, Konkurrensverket, Swedish Competition Authority, 22, 36 (2008).

(67.) Id. at 22-23, 37.

(68.) Joseph A. Schumpeter, Capitalism, Socialism, and Democracy 106 (1975). Modern economists, such as William Baumol, have expanded on the idea that large, oligopolistic firms are important drivers of innovative activity and dynamic growth. See, e.g., William Baumol, The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (2002) (Oligopolistic competition among large, high-tech business firms, with innovation as a prime competitive weapon, ensures continued innovative activities and their growth. In oligopolistic markets with a few large firms, innovation has replaced price as the name of the game.).

(69.) For a critical discussion of this theory, see Morton Kamien & Nancy Schwartz, Self Financing of an R&D Project, 68 Am. Econ. Rev. 252 (1978).

(70.) See discussion of many of these points in Scherer & Ross, supra note 20, at ch. 5.

(71.) Richard Levin, Wesley Cohen, & David Mowery, R&D, Appropriability, Opportunity, and Market Structure: New Evidence on Some Schumpeterian Hypotheses, 75 Am. Econ. Rev. 20 (1985). However, economic theory has also identified situations where incumbent firms with large shares that face the threat of entry may undertake more, not less, innovative effort. See, e.g., Federico Etro, Innovation by Leaders, 114 Econ. J. 281 (2004) (In a patent race, as long as entry is free, the incumbent has more incentives to invest than any outsider.).

(72.) See, e.g., William Baldwin & John Scott, Market Structure and Technical Change (1987). For a study that finds an "inverted U" relationship, see F. M. Scherer, Innovation and Growth: Schumpeterian Perspectives 246 (1984).

(73.) See Levin, Cohen, & Mowery, supra note 71; John Scott, Firm versus Industry Variability in R&D Intensity, in R&D, Patents, and Productivity 233 (Zvi Griliches, ed., 1984).

(74.) For an a discussion of this issue and an empirical effort to sort it out, see David Ravenscraft & F.M. Scherer, The Lag Structure of Returns to Research and Development, 14 Applied Econ. 603 (1982); Ben Branch, Research and Development Activity and Profitability: A Distributed Lag Analysis, 82 J. Pol. Econ. 999 (1974).

(75.) For example, there are simulation results showing how R&D affects market structure. Richard Nelson & Sidney Winter, An Evolutionary Theory Of Economic Change chs. 13, 14 (1982).

(76.) See Levin, Cohen, & Mowery, supra note 71; Glenn Loury, Market Structure and Innovation, 93 Q.J. Econ. 395 (1979); Tom Lee & Louis Wilde, Market Structure and Innovation: A Reformulation, 94 Q.J. Econ. 429 (1980); Pankaj Tandon, Innovation, Market Structure, and Welfare, 74 Am. Econ. Rev. 394 (1984).

(77.) See Ravenscraft & Scherer, supra note 46, at 3. However, there is also the related possibility that executives undertake mergers because they have an inflated opinion of their managerial capabilities and thus their ability to employ the assets more productively. See, e.g., Richard Roll, The Hubris Hypothesis of Corporate Takeovers, 59 J. Bus. 197 (1986).

(78.) While we have categorized mergers that are based on differences in opinions about future assets values as having "speculative" motives rather than "efficiency" motives, this does not mean that these mergers do not lead to market efficiencies. To the contrary, speculative mergers may be part of the free market economy's adjustment in asset values to better reflect true social values. Or, it may be that the shift in asset ownership to a more optimistic owner means that assets come under the control of an owner who will exploit them more aggressively, leading to static and/or dynamic efficiencies. However, it is also the case that this speculation may be based on expectations that are not well founded (e.g., they may be part of a speculative bubble). Some economists have identified circumstances where they believe mergers were motivated by promoters who expected to make money on the transaction because of their ability to take advantage of information imperfections to convince some market participants that the merger would lead to higher values far exceeding their true economic values. For example, one economist studied 328 mergers consummated between 1888 and 1905 and discovered that 141 were financial failures for the acquirers. See, e.g., Shaw Livermore, The Success of Industrial Mergers, 49 Q.J. Econ. 165 (1984). Similarly, Jesse Markham found that mergers that were promoted by outside banks and syndicates were much more likely to fail than those that were funded by individuals with continuing interests in the acquired assets, leading him to conclude that the quest for promotional profits was the most important motive for mergers during the 1897-1899 and 1926-1929 periods. Jesse Markham, Survey of the Evidence and Findings on Mergers in National Bureau of Economic Research Conference Report, Business Concentration and Price Policy 163, 181 (1955). See also Richard DuBoff & Edward Herman, The Promotional Financial Dynamic of Merger Movements: A Historical Perspective, 23 J. Econ. Issues 107 (1989).

(79.) Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932).

(80.) Michael C. Jensen & Jerold B. Warner, The Distribution of Power Among Corporate Managers, Shareholders, and Directors, 20 J. Fin. Econ. 3 (1988); Rene M. Stulz, Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control, 20 J. Fin. Econ. 25 (1988); Larry Y. Dann & Harry DeAngelo, Corporate Financial Policy and Corporate Control: A Study of Defensive Adjustments in Asset and Ownership Structure, 20 J. Fin. Econ. 87 (1988); Oliver Williamson, Organization Form, Residual Claimants, and Corporate Control, 26 J.L. & Econ. 351 (1983).

(81.) See Ravenscraft & Scherer, supra note 46, at 3.

(82.) Dennis Mueller, The Determinants and Effects of Mergers 306 (Dennis Mueller ed., 1980).

(83.) A. Jacquemin & M. Slade, Cartels, Collusion, and Horizontal Merger in Handbook of Industrial Organization 437 (R. Schmalensee & R. Willig eds., 2008).

(84.) G. Meeks, Disappointing Marriage: A Study of Gains from Merger 33-34 (1977).

(85.) A. Singh, Takeovers, Their Relevance to the Stock Market and the Theory of the Firm 166 (1971).

(86.) See, e.g., Michael Jensen & Richard Ruback, The Market for Corporate Control: The Scientific Evidence, 11 J. Fin. Econ. 5 (1983); Gregg Jarrell, James Brickley, & Jeffry Netter, The Market for Corporate Control: The Empirical Evidence Since 1980, 2 J. Econ. Persp. 49 (1988).

(87.) Michael Jensen & Richard Ruback, supra note 86, at 5, 20-22 (reporting a 5.5 percent decline after one year); see also Ellen Magenheim & Dennis Mueller, Are Acquiring-Firm Shareholders Better Off after an Acquisition? in Knights, Raiders, and Targets: The Impact of the Hostile Takeover 177-81 (John Coffee, Louis Lowenstein, & Susan Rose-Ackerman eds., 1988) (reporting a 16 percent decline after three years).

(88.) See Scherer, Beckenstein, Kaufer, & Murphy, supra note 32, at 169, 308, 321. See also Paul M Healy, Krishna G. Palepu, & Richard S. Ruback, Does Corporate Performance Improve After Mergers, 31 J. Fin. Econ. 135 (1992); Stephen A. Rhoades, The Efficiency Effects of Bank Mergers: An Overview of Case Studies of Nine Mergers, 22 J. Banking & Fin. 273 (1998); Gregor Andrade, Mark Mitchell, & Erik Stafford, New Evidence and Perspectives on Mergers, 15 J. Econ. Persp. 103 (2001).

(89.) See Ravenscraft & Scherer, supra note 46, at 38-44, 207-12. For example, around half of the conglomerate mergers undertaken during the 1960s and early 1970s in the United States were later undone through the sale of the acquired units and the average operating income of the divested units was negative in the year before sell-off commenced. Id. at 164-68. However, other studies have found that capital costs and marketing economies are present, which suggests that there may be some efficiencies associated with conglomerate mergers. See, e.g., John Kitching, Why do Mergers Miscarry?, 45 Harvard Bus. Rev. 87, 93 (1967).

(90.) For studies of horizontal mergers, see, e.g., Ravenscraft & Scherer, supra note 46, at 99, 212; Paul M Healy, Krishna G. Palepu, & Richard S. Ruback, Does Corporate Performance Improve After Mergers?, 31 J. Fin. Econ. 135 (1992); Gregor Andrade, Mark Mitchell, & Erik Stafford, New Evidence and Perspectives on Mergers, 15 J. Econ. Persp. 103 (2001). Fora review of studies of vertical mergers, see, e.g., Jeffrey Church, Vertical Mergers, 2 Issues in Competition L. & Pol'y, 1455 (2008), who concluded that "[A] key consideration in determining optimal vertical merger policy is the economic presumption, on both theoretical and economic grounds, that vertical mergers are likely efficiency enhancing and beneficial for consumers.... The empirical evidence supports this presumption. That evidence is consistent with two propositions: (1) that instances of vertical integration and merger are consistent with the hypotheses of transaction cost economics, and (2) that instances of vertical merger that are harmful for consumers are very infrequent." Id. at 1495. See also Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries; The Evidence, 45 J. Econ. Literature 629 (2007); James C. Cooper, Luke M. Froeb, Dan O'Brien & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 Int'l J. Indus. Org. 639 (2005).

(91.) While the Supreme Court has considered merger efficiencies in three pre-1970 Section 7 cases (and it provided somewhat conflicting approaches that do not embrace the favorable consideration of efficiencies as clearly as the Merger Guidelines), more recent lower court decisions have moved in the direction of considering efficiencies as outlined in the Merger Guidelines. The Merger Guidelines now have a section that outlines the antitrust agencies' analysis of efficiencies. See, e.g., Robert Schlossbero, Mergers and Acquisitions: Understanding the Antitrust Issues 175-201 (2004). By the late 1980s, courts were seriously considering efficiencies in merger cases. See, e.g., United States v. Rockford Memorial Corp., 717 F. Supp. 1251 (N.D. Ill. 1989), affd 898 F.2d 1278 (7th Cir. 1990); United States v. Carilion Health Systems, 707 F. Supp 840, 849 (W.D. Va. 1989), affd mem., 892 F.2d 1042 (4th Cir. 1989).More recently, courts have started relying on the Merger Guidelines. For example, the 1997 revisions to the Merger Guidelines have been relied upon by courts. See, e.g., FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001); United States v. H&R Block, Inc., 2011 U.S. Dist. LEXIS 130219 (D.D.C. 2011); FTC v. CCC Holdings, 605 F. Supp. 2d 26, 72-75 (D.D.C. 2009); Untied States v. Oracle Corp., 331 F. Supp. 2d 1098, 1175 (N.D. Cal. 2004); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 105-53 (D.D.C. 2004); FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997); Untied States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N Y. 1997).

(92.) Merger Guidelines, [section] 10.

(93.) U.S. Department of Justice and Federal Trade Commission, Commentary on the Horizontal Merger Guidelines (March 2006), http://www.justice.gov/atr/public/guidelines/215247.htm.

(94.) Merger Guidelines Commentary, p. 49. According to the Merger Commentary, mergers that were allowed at least in part because of efficiencies were Gai's-United States Bakery (DOJ 1996); IMC Global-Western Ag (DOJ 1997), PayPal-eBay (DOJ 2002); Nucor-Birmingham Steel (DOJ 2002); Genzyme-Novazyme (FTC 2004); Genzyme-Ilex (FTC 2004); Toppan-DuPont (DOJ 2005); and Verizon-MCI; SBC-AT&T (DOJ 2005). While the Merger Commentary provides a number of citations to specific antitrust investigations in which the agencies considered efficiencies, many others can be found on the agencies' websites and in published cases. See, e.g., FTC v. Staples, 970 F. Supp. 1066 (1997); FTC v. Cardinal Health Inc., 12 F. Supp.2d 34, 43-44 (D.D.C. 1998).

(95.) See, e.g., FTC v. H.J. Heinz Co., 246 F.3d 708, 720-22 (D.C. Cir. 2001) (rejecting efficiencies defense due to high concentration levels and insufficient showing that merger was only way to realize efficiencies); FTC v. Univ. Health, 938 F.2d 1206, 1223 (11th Cir. 1991) ("Economies employed in defense of a merger must be shown in what economists label 'real terms.' To hold otherwise would permit a defendant to overcome a presumption of illegality based solely on speculative, self-serving assertions.") (citation omitted); United States v. H&R Block, Inc., 2011 U.S. Dist. LEXIS 130219 at *149 (D.D.C. 2011) (finding that H&R Block's failure to achieve projected efficiencies in a previous merger underscored absence of verifiability of claimed efficiencies); FTC v. CCC Holdings, 605 F. Supp. 2d 26, 7375 (D.D.C. 2009) (merging parties failed to provide "proof of market as efficiencies were too far afield and too speculative."); United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1175 (N.D. Cal. 2004) (rejecting efficiencies defense as "too vague and unreliable to rebut a showing of anticompetitive effects."); United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 137 (E.D.N.Y 1997) ("[Defendants must clearly demonstrate that the proposed merger itself will create a net economic benefit for the health care consumer.").

(96.) "The Agencies credit only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects." Merger Guidelines, [section] 10.

(97.) They "will not be considered if they are vague, speculative, or otherwise cannot be verified by reasonable means." Id.

(98.) The Merger Guidelines state that for a merger-specific efficiency to be cognizable, the efficiency cannot "arise from anticompetitive reductions in output or service." Moreover, the Merger Guidelines also indicate that the agencies will "normally" challenge a merger even if there are cognizable efficiencies if the merger has an anticompetitive effect in some relevant market. Id.

(99.) "Cognizable efficiencies are assessed net of costs produced by the merger or incurred in achieving those efficiencies." Id.

(100.) Id.

(101.) Id.

(102.) Id. The Merger Guidelines suggest that efficiency claims are more likely to be viewed as credible if they can be "substantiated by analogous past experience." Id.

(103.) Courts often reject efficiencies because they are not well documented and/or because they are not merger- specific. Often cases where the merging parties have prevailed and efficiencies are cited, the court found for the merging firms based on other grounds related to market structure or competitive effects. See, e.g., Robert Schlossberg, Mergers and Acquisitions: Understanding the Antitrust Issues 175-201 (2004). However, there are cases where efficiencies clearly played a key role in a court decision that allowed a merger to proceed. See, e.g., FTC v. Butterworth Health Corp., 946 F. Supp. 1285 (W.D. Mich. 1996), aff'd mem., 121 F.3d 708 (6th Cir. 1997).

(104.) Malcolm Coate & Andrew Heimert, Merger Efficiencies at the Federal Trade Commission 1997-2007 (2009), http:// www.ftc.gov/sites/default/files/documents/reports/merger-efficiencies-federal-trade-commission-1997%E2%80%932007 /0902mergerefficiencies.pdf.

(105.) Id. at 35-36. The Coate-Heimert study identified a number of different types of efficiencies that were claimed by merging firms and, at least in some cases, confirmed by the FTC's investigations. These efficiencies included fixed-cost savings such as overhead reductions, plant or facilities "rationalization," savings on research and development, and promotional and marketing efficiencies. They also identified variable-cost savings such as production-cost efficiencies, distribution-cost reductions, raw material economies, and implementation of "best practices" (implementation of one company's superior, and cheaper, production methods).

(106.) The agencies not only consider the effect of mergers on static pricing, but also on non-price competition (such as R&D), reflecting a concern for dynamic efficiency. See, e.g., Genzyme Corp./Novazyme Corp (FTC 2004) (where the merger of the only two companies developing therapies for a rare disorder known as Pompe disease and the FTC evaluated the transaction's potential impact on the pace and scope of research into the development of a treatment for Pompe disease). File No. 021 0026, Closing of Investigation of Genzyme Corporation Acquisition of Novazyme Pharmaceuticals, Inc. (Jan. 14, 2004), http://www.ftc.gov/opa/2004/01/genzyme.htm; Statement of Chairman Timothy J. Muris in the matter of Genzyme Corporation / Novazyme Pharmaceuticals, Inc. (Jan. 14, 2004), http://www.ftc.gov/ os/2004/01/murisgenzymestmt.pdf.

(107.) See Williamson, supra note 17, at 18; Raymond Jackson, The Consideration of Economies in Merger Cases, 43 J. Bus. 439 (1970); Joseph Kattan, Efficiencies and Merger Analysis, 62 Antitrust L.J. 513 (1994); Mark N. Berry, Efficiencies and Horizontal Mergers: In Search of a Defense, 33 San Diego L. Rev. 515 (1996); Gregory J. Werden, An Economic Perspective on the Analysis of Merger Efficiencies, 11 Antitrust 12 (Summer 1997); Timothy J. Muris, The Government and Merger Efficiencies: Still Hostile After All These Years, 1 Geo. Mason. L. Rev. 729 (1999); Robert Pitofsky, Efficiencies in Defense of Mergers: Two Years After, 1 Geo. Mason. L. Rev. 485 (1999); William J. Kolasky & Andrew R. Dick, The Merger Guidelines and the Integration of Efficiencies into Antitrust Review of Horizontal Mergers, 71 Antitrust L.J. 207 (2003); Jamie Henikoff Moffitt, Merging in the Shadow of the Law: The Case for Consistent Judicial Efficiency Analysis, 63 Vand. L. Rev. 1697 (2010); Daniel A. Crane, Rethinking Merger Efficiencies, 110 Mich. L. Rev. 347 (2011). One fundamental issue that is not addressed in the text is whether the view that mergers can lead to significant efficiencies has caused merger standards, such as the Merger Guidelines, to be too lenient because of a fear that efficiency-enhancing mergers would be deterred. For example, if the agencies assumed that efficiencies were less likely to occur, would the concentration thresholds that are used be set at lower levels? While this is clearly an important issue, there is no sound empirical evidence supporting this criticism. Stephen Calkins, The New Merger Guidelines and the Herfindahl-Hirschman Index, 71 Cal. L. Rev. 402 (1983); Barry C. Harris & David D. Smith, The Merger Guidelines v. Economics: A Survey of Economic Studies, Antitrust Report 23 (1999); Dennis W. Carlton, Revising the Horizontal Merger Guidelines, 6 J. Competition L. & Econ. 619 (2010).

(108.) The Supreme Court's 1977 Sylvania decision marked a watershed for rule of reason analysis, particularly with respect to the treatment of vertical restraints. Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). For general discussions of rule of reason analysis of monopolization cases, see American Bar Association Antitrust Section, Antitrust Law Developments (Seventh) (2012), Volume I, at 51-83.

(109.) Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).

(110.) Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979).

(111.) See, e.g., United States v. Visa U.S.A, Inc., 344 F.3d 229, 238 (2d Cir. 2003) ("Once [the plaintiff's] initial burden is met, the burden of production shifts to the defendants, who must provide a precompetitive justification for the challenged restraint."); Law v. NCAA, 134 F.3d 1010, 1021 (10th Cir. 1998) ("Once the plaintiff meets [its] burden, ... the burden shifts to the defendant to justify the restraint as a 'reasonable' one."); Brown Univ., 5 F.3d at 669 (if plaintiff meets its initial burden, the "burden shifts to the defendant to show that the challenged conduct promotes a sufficiently pro-competitive objective"); Flegel v. Christian Hosp., 4 F.3d at 682, 688 (8th Cir. 1993) ("Either showing--market power or actual detrimental effects--shifts the burden to the defendant to demonstrate pro-competitive effects"; Bhan v. NME Hosps., 929 F. 2d 1404, 1413 (9th Cir. 1991) (if plaintiff satisfies initial burden, defendant "must offer evidence of pro-competitive effects"); cf. SCFC ILC, Inc. v. Visa U.S.A., Inc. v. Visa U.S.A., Inc., 36 F.3d 958, 965 (10th Cir. 1994) ("if market power is found, the court may then proceed under rule of reason analysis to assess the precompetitive justifications of the alleged anticompetitive conduct."). But cf. Seagood Trading Corp. v. Jerrico, Inc., 924 F.2d 1555, 1570 (11th Cir. 1991) ("The burden of proving such an unjustified competitive effect is on the plaintiffs."). When the anticompetitive character of the restraint is especially strong, or where the anticompetitive effects are sufficiently severe, the burden of persuasion (as well as the burden of production) will then shift to the defendant. NCAA, 468 U.S. at 113 (once sufficiently severe anticompetitive behavior is shown, defendant bears "a heavy burden of establishing an affirmative defense which competitively justifies this apparent deviation from the operations of a free market").

(112.) See, e.g., Visa U.S.A., 344 F.3d at 238 (if defendants carry burden of providing a procompetitive justification, plaintiff "must prove either that the challenged restraint is not reasonably necessary to achieve the defendants' procompetitive justification, or that those objectives may be achieved in a manner less restrictive of free competition"); see also SCFC ILC, 36 F.3d at 970 ("What we ask under section 1 is whether the alleged restraint is reasonably related to [the defendant's] operation and no broader than necessary to effectuate the association's business."); Brown Univ., 5 F.3d at 669, 678; Flegel, 4 F.3d at 688; Bhan, 929 F.2d at 1413 ("the plaintiff ... must then try to show that any legitimate objectives can be achieved in a substantially less restrictive manner").

(113.) Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54-55 (1977).

(114.) Leegin Creative Leather Products, Inc. v. PSK.S, Inc., 551 U.S. 877 (2007). In this case the Court held that RPM arrangements are not illegal per se under the Sherman, but instead subject to rule of reason analysis, which allows resale price maintenance if its procompetitive benefits outweigh its anticompetitive effects.

(115.) Broadcast Music, Inc. v. CBS, 441 U.S. 1, 18-23 (1979).

(116.) See, e.g., FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 459 (1986) (dictum); Paladin Assocs. v. Mont. Power Co., 328 F.3d 1145, 1157 (9th Cir. 2003) (five-year assignment to competitor of natural gas transportation rights was "more efficient than assigning transportation on a yearly basis, because it eliminate[d] the transaction costs of renegotiating agreements on a yearly basis"); Seagood Trading, 924 F.2d at 1571-72 (economies of scale from food distribution system); Crane & Shovel Sales Corp. v. Bucyrus-Erie Co., 854 F.2d 802, 810 (6th Cir. 1988) (affirming dismissal of complaint and noting that substituting exclusive distributorship for several distributors may enhance interbrand competition); Westman Comm'n Co. v. Hobart Int'l, 796 F. 2d 1216, 1226-27 (10th Cir. 1986) (discussing procompetitive reasons for a manufacturer limiting the number of its distributors); Supermarket of Homes v. San Fernando Valley Bd. of Realtors, 786 F.2d 1400, 1407 (9th Cir. 1986) (real estate board's multiple listing service access rules enhanced the ability of brokers to match homes and buyers).

(117.) See, e.g.. Broad. Music, 441 U.S. at 23 (noting that "joint ventures and other cooperative arrangements are ... not usually unlawful ... where the agreement on price is necessary to market the product at all"); see also NCAA, 468 U.S. at 101 (per se approach inappropriate where "horizontal restraints on competition are essential if the product is to be available at all"); Paladin Assocs., 328 F.3d at 1157 (five-year assignment of natural gas transportation rights was "a new 'product' that filled a need [and] provided a new option for purchasers of transportation rights"); SCFC ILC, 36 F.3d at 964 ("key to the analysis of the competitive significance of the restraint is the [Supreme Court's] appreciation that the horizontal restraint may be essential to create the product in the first instance") (internal citations and quotation marks omitted).

(118.) American Bar Association Antitrust Section, 7 Antitrust L. Dev. 74-77 (2012).

(119.) See, e.g., United State v. Visa U.S.A., Inc., 344 F.3d 229, 243 (2d Cir. 2003) (affirming finding that there was "no evidence to suggest that allowing member banks to issue cards of rival networks would endanger [network] cohesion"); Toys "R" Us, Inc. v. FTC, 221 F.3d 928, 938 (7th Cir. 2000) (record did not support retailer's claim that its policy restricting manufacturers' distribution of toys to warehouse clubs was a legitimate attempt to combat free riding); Wilk v. Am. Med. Ass'n, 895 F. 2d 352, 362-64 (7th Cir. 1990) (affirming finding that evidence did not support patient care defense); Graphic Prods., 717 F.2d at 1577-78 (no evidence that restraint improved service coverage).

(120.) Bus Elecs. Corp., 486 U.S. at 724 (citing Sylvania, 433 U.S. at 52 n. 19). Post-Sylvania lower court decisions dealing with nonprice vertical restraints likewise have emphasized the procompetitive possibilities of intrabrand restraints. See, e.g., S. Card & Novelty, Inc. v. Lawson Mardon Label, Inc., 138 F.3d 869, 875 (11th Cir. 1998) (noting the potential of vertical restraints to stimulate interbrand competition); K.M.B. Warehouse Distribs., 61 F.3d at 127-28 ("[Restrictions on intrabrand competition can actually enhance market-wide competition by fostering vertical efficiency and maintaining the desired quality of a product").

(121.) U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for Collaborations Among Competitors (2000), http://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings- antitrustguidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf.

(122.) U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property (1995) available al http://www.ftc.gov/sites/default/files/attachments/competition-policy-guidance/0558.pdf.

(123.) See U.S. Department of Justice and Federal Trade Commission, supra note 121, [section] 3.37 ("In assessing the overall competitive effect of an agreement, the Agencies consider the magnitude and likelihood of both the anticompetitive harms and cognizable efficiencies from the relevant agreement ") As is true for the Merger Guidelines, "cognizable efficiencies" are defined as "efficiencies that have been verified by the Agencies, that do not arise from anticompetitive reductions in output or service, and that cannot be achieved through practical, significantly less restrictive means." Id. at [section] 3.36. "Cognizable efficiencies are assessed net of costs produced by the competitor collaboration or incurred in achieving those efficiencies." Id. The parties claiming the efficiencies have the burden of demonstrating the efficiencies so that they can be verified by the agency. Id. at [section] 3.36(a).

(124.) See Elzinga, supra note 7; Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1 (1984); Eleanor M. Fox, Monopolization and Dominance in the United States and the European Community: Efficiency Opportunity and Fairness, 61 Notre Dame L. Rev. 981 (1986); William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. Econ. Persp. 43 (2000).

(125.) Lande, Wealth Transfers, supra note 3, at 81 ("[t]he antitrust laws are among the least precise statutes enacted by Congress," and "it is not possible to ascertain with certainty the original goals of the antitrust laws.").

(126.) Robert Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & Econ. 7 (1966) at 47 argues:

   It is difficult to resist the conclusion that the most faithful
   judicial reflection of Senator Sherman's and his colleagues' policy
   intentions was the rule of reason enunciated by Chief Justice White
   in the 1911 Standard Oil and American Tobacco opinions. There was
   in White's opinions as in Sherman's speeches the idea that the
   statute was concerned exclusively with consumer welfare and that
   this meant the law must discourage restriction of output without
   hampering efficiency. White appears also to have incorporated into
   his rule of reason those major rules of law which Sherman envisaged
   as alterable as economic analysis progresses, however. White
   clearly foresaw this and incorporated that principle of change in
   to the rule of reason.


(127.) Bork describes this when he comments:

   Courts charged by Congress with the maximization of consumer
   welfare are free to revise not only prior judge-made rules, but it
   would seem, rules contemplated by Congress. The Sherman Act defines
   the class of situations to which it may be applied, but it does not
   freeze into statutory commands the rules of legality about
   predation, mergers, and so forth, that many congressmen
   contemplated.... In terms of "law," therefore, the Sherman Act
   tells judges very little. A judge who feels compelled to a
   particular result regardless of the teachings of economic theory
   deceives himself and abdicates his delegated responsibility. That
   responsibility is nothing less than the awesome task of continually
   creating and recreating the Sherman Act out of his understanding of
   economics and his conception of the requirements of the judicial
   process. Id. at 48.


Others have noted that antitrust law has evolved over time with economic learning. See, e.g., Daniel Rubinfeld, Antitrust Policy, International Encyclopedia of the Social and Behavioral Sciences 553, 559 (2001) ("Antitrust policy has undergone incredible change over the twentieth century. As the views about the nature of markets and arrangements among firms held by economists and others have changed, so has antitrust.").

Philip Nelson, Principal, Economists Incorporated, Washington, DC, USA

David Smith, Vice President, Economists Incorporated, Washington, DC, USA

Corresponding Author:

Philip Nelson.

Email: nelson.p@east.ei.com

Author Biographies

Dr. Nelson was Assistant Director for Competition Analysis in the Federal Trade Commission's Bureau of Economics.

Dr. Smith was a staff economist with the Economic Policy Office of the Antitrust Division of the U.S. Department of Justice.
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Title Annotation:Symposium: The Role of Efficiencies in Antitrust Law
Author:Nelson, Philip; Smith, David
Publication:Antitrust Bulletin
Date:Jun 22, 2015
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