Merger review is the antitrust version of “preemption” doctrine. The Federal Trade Commission and Department of Justice routinely challenge mergers not to prevent any actual injury that will occur, but to preempt theoretical injuries that might occur. Antitrust lawyers have long championed the theory of “pure and perfect competition,” but merger review makes things even more abstract by authorizing the government to initiate force based on nothing more than speculation.For example, earlier this month the FTC imposed conditions on General Electric’s $900 million acquisition of InVision, a firm that, along with GE, manufactures x-ray and inspection equipment. The FTC said combining the two companies as-is would result in “highly concentrated” markets for three types of x-ray equipment. The FTC’s complaint never defines “highly concentrated,” but presumably the agency’s staff relied on the Herfindahl index, which has no economic merit but provides political cover for regulators, who can point to a large index number and summarily declare the market is “highly concentrated.”
In the case of GE and InVision, the FTC said the “highly concentrated” market would mean GE could “unilaterally exercise market power,” which the Commission defines as the ability to raise prices five to ten percent without a “significant” number of customers switching to an alternative product. (And any alternative product must be identical for the FTC to consider it part of the market.) The FTC assumes no new competitors will enter the market in the foreseeable future because entry is a “difficult and time-consuming process.”
The FTC’s solution? Force GE to divest part of InVision’s x-ray business to a third company chosen by the government. This, according to the FTC, will “ensure that the competitive environment that existed prior to the acquisition is maintained.”
There are two obvious questions the FTC’s “solution” raises. First, if the FTC believes the free market can’t produce a viable competitor to GE-InVision, why does the agency believe a competitor created by government fiat will succeed? And second, why is the “competitive environment” that existed just before the GE-InVision merger considered the ideal? Why not break up GE’s x-ray business entirely and spread it among several firms? That would be more consistent with a pure and perfect competition model.
Unfortunately, GE acquiesced to the FTC’s divestiture demand rather than contest the agency’s fallacious economic reasoning. GE’s lawyers no doubt warned management that failure to accept preemptive punishment would only further incur the FTC’s wrath. The Bush administration rejects “appeasement” in foreign policy, but when it comes to antitrust, companies are expected to crawl on their hands and knees before the regulators.