What Does Expanding Horizontal Control Mean for Antitrust Enforcement? A Look at Mergers, Partial Ownership, and Joint Ventures

Abstract

The many mechanisms for expanding horizontal ownership and control of economic resources pose ongoing challenges for merger enforcement. This is readily apparent in markets that have undergone profound structural change from horizontal consolidation and rising concentration over the last several decades, including wireless telecommunications, airlines, hospitals, health insurance, meat processing, and others. Horizontal control is a central concept in industrial organization and frequently encountered concern in antitrust enforcement. For example, the vast majority of all merger transactions challenged by the U.S. Department of Justice (DOJ) Antitrust Division and Federal Trade Commission (FTC) involve some form of horizontal control. Horizontal mergers that completely and permanently eliminate an independent competitor receive the most attention. But other forms of horizontal control that do not completely eliminate a rival — including acquisitions of partial ownership stakes and some joint venture agreements — have no less important implications for competition and consumers. For example, production, marketing, and R&D joint ventures (or “competitor collaborations”) can weaken incentives for parties to the agreement to compete independently. Such arrangements have become more common, as we have seen, for example, in the agricultural biotechnology and pharmaceutical sectors. Rivals’ partial ownership stakes in each other, and private equity and institutional investors that acquire stakes in multiple rivals competing in the same product markets, can also weaken competitive incentives. Private equity buyouts raise broader concerns about the damage left behind in the wake of rapid exits and in raising prices to consumers. Yet there remains little transparency around the role of private equity in the broader landscape of horizontal control. Moreover, research indicates that partial ownership can lessen incentives to compete more than under a monopoly. Meanwhile, there is ongoing debate over whether antitrust can reach to competitive issues raised by institutional investor ownership of stock in rivals in sectors such as airlines and banking. As antitrust enforcers try to keep pace with the many forms of horizontal control and their competitive implications, we see indications of weakening merger enforcement under Section 7 of the Clayton Act. For example, the scales have tipped sharply toward merging parties in merely predicting the pro-competitive effects of their deals, while the government bears a nearly insurmountable burden of proving that a merger will harm competition. Research shows that the benefits of mergers are often speculative and never materialize, leaving consumers with higher prices, lower quality, less innovation. Moreover, data on merger enforcement reveals that the antitrust agencies increasingly seek remedies for problematic mergers, rather than moving to block them or to force their abandonment. Yet we see a growing list of failed merger remedies, leaving consumers with higher prices, lower quality, and less innovation. Given its many faces, ubiquity, and indubitable link to market concentration, it is time to take a fresh look at horizontal control. Analysis in this White Paper reveals troubling issues for antitrust enforcement in light of rising concentration, weakening enforcement, evidence of failed mergers and merger remedies, and growth of the partial ownership model. These takeaways should inform potential antitrust reform proposals and approaches to invigorating merger enforcement and competition policy. The first part of the paper examines the competitive dynamics of different forms of horizontal control. The second part examines major enforcement and policy issues raised by expanding horizontal control and highlights areas of much needed analysis. This includes analyses of failed merger remedies, whether litigated mergers have produced claimed benefits, and how partial ownership acquisitions by private equity firms have affected market concentration. The paper also recommends that the agencies withdraw the “safe harbor” provision for some partial ownership acquisitions in their proposed revisions to the Hart Scott Rodino (HSR) Act filing requirements.