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THE MERGER GUIDELINES AND THE INTEGRATION OF EFFIC IENC IES INTO ...

THE MERGER GUIDELINES AND THEINTEGRATION OF EFFIC IENC IES INTOANTITRUST REVIEW OF HORIZONTAL MERGERSWilliam J. KolaskyAndrew R. Dick*I. INTRODUCTIONThere is a widening consensus among jurisdictions with competitionlaws that “the basic objective of competition policy is to protect competi-
tion as the most appropriate means of ensuring the efﬁcient allocation
of resources—and thus efﬁcient market outcomes—in free market econ-
omies.”1As this statement indicates, it is efﬁciency, not competition, thatis the ultimate goal of the antitrust laws. One of the senior economists
of the Justice Department’s Antitrust Division put it very well recently:
“efﬁciency is the goal, competition is the process.”2When the competitiveprocess is allowed to run its course—unfettered by exclusionary practices
or anticompetitive agreements among ﬁrms—the incentive of ﬁrms to
lure away rivals’ customers by offering them lower prices, superior quality,
or new product features will necessarily lead these ﬁrms to seek more* Mr. Kolasky is a Member of the District of Columbia Bar. He served as Deputy AssistantAttorney General in the Antitrust Division of the U.S. Department of Justice from 2001
to 2002. Dr. Dick is a Principal with Charles River Associates, Inc., Washington, D.C. When
this article was written, he was Acting Chief of the Competition Policy Section in the
Antitrust Division of the U.S. Department of Justice. The authors thank Craig W. Conrath,
a Senior Litigator in the Antitrust Division of the U.S. Department of Justice, for assistance
in drafting the sections on the 1997 revisions and the role of efﬁciencies in merger
review in other jurisdictions, and Constance Robinson, Director of Civil Enforcement,
and Gregory J. Werden, Senior Economic Counsel, for their very helpful comments. The
authors also thank Sheldon Kimmel, an economist at the Division, for the example in
note 134 and for calling our attention to the Hoffman v. MacMullan case in note 4. This
paper reﬂects the authors’ personal views only. The authors also thank Christina Akers,
Joseph Wheatley, and Gloria Jenkins for cite checking and polishing the ﬁnal product,
and Gari Lister for her excellent editorial suggestions.1Organization for Economic Co- operation and Development, Competition Policy andEfﬁciency Claims in Horizontal Agreements, OECD/GD (96) 65, Paris (1996).2Kenneth Heyer, Address Before the Merger Task Force of the European Commission’sDirectorate General for Competition (Apr. 9, 2002). See also Lawrence Summers, Competition
Policy in the New Economy, 69 Antitrust L.J. 353, 358 (2001) (“it needs to be remembered
that the goal is efﬁciency, not competition. The ultimate goal is that there be efﬁciency”).207World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal208efﬁcient ways to do business. Only by devising more efﬁcient means to
produce and distribute their goods, or by ﬁnding ways to offer superior
or additional features for the same cost, can ﬁrms displace sales by their
competitors. Antitrust enforcement therefore assumes as its mandate the
deterrence of business conduct that threatens to distort the competitive
process in product and innovation markets.The fundamental reason we favor competition over monopoly is thatcompetition tends to drive markets to a more efﬁcient use of scarce
resources. There are four distinct types of efﬁciencies that competition
promotes. Competition promotes allocative efﬁciency by leading ﬁrms to
produce output up to the point where the marginal cost of each unit
just equals the value of that unit to consumers. Competition promotes
productive efﬁciency by forcing ﬁrms to cut their costs in order not to lose
sales to more efﬁcient rivals. Competition promotes dynamic efﬁciency
by stimulating investment and innovation. And competition promotes
transactional efﬁciency because, faced with competition, ﬁrms will seek out
the least expensive means of carrying out transactions.3Over the last ﬁfty years, the U.S. courts have increasingly recognizedthat efﬁciencies are an essential part of rule of reason analysis under
Section 1 of the Sherman Act. The original formulation of the rule of
reason in Standard Oil spoke vaguely of condemning agreements that
“had not been entered into or performed with the legitimate purpose
of reasonably forwarding personal interest and developing trade” but
instead for the purpose of “restraining the free ﬂow of commerce and
tending to bring about the evils, such as enhancement of prices, that
were considered to be against the public interest.”4Over time, this formu-lation was replaced by a structured balancing test, under which the courts
weigh the likely anticompetitive effects of a restraint in terms of creat-
ing or enhancing market power against its procompetitive efﬁciency-
enhancing beneﬁts.53Because lawyers tend to think of efﬁciencies only in terms of production cost savings,often neglecting allocative, transactional and dynamic efﬁciencies, we have appended to
this article an economic taxonomy of the four distinct types of efﬁciencies.4U.S. v. Standard Oil Co., 221 U.S. 1, 58 (1911). An even earlier decision in the NinthCircuit anticipated the Court’s approach in Standard Oil. See Hoffman v. McMullen, 83 F.
372, 376–77 (9th Cir. 1897) (noting that the common law allows “cooperation between
two or more persons to accomplish an object which neither could gain . . . alone . . .
although, in a certain sense and to a limited degree, such co- operation might have a
tendency to lessen competition”).5See, e.g., Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 20 (1979) (holding that theinquiry under section 1 should focus on whether the practice is one that would “tend to
restrict competition and decrease output” or one “designed to increase economic efﬁciencyWorld Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies209Curiously, acceptance that efﬁciencies should also be an integral partof the competitive effects analysis of mergers has come more slowly.
Until the 1982 Merger Guidelines, merger analysis was heavily driven by
structural presumptions based on market shares and market concentra-
tion. Indeed, the strength of these presumptions led the Supreme Court
in Brown Shoe6to treat protection of competition and the pursuit ofefﬁciencies as directly conﬂicting objectives. Even the Chicago School
during the 1960s and 1970s took a highly structural approach to merger
law. While Chicagoans criticized the merger decisions of the Warren
Court era (and the enforcement policy of the federal antitrust agencies
during that era) as setting the market share/concentration thresholds
for mergers too low, and while they warned that concentration could
well reﬂect underlying efﬁciencies of large-scale enterprises that would
be sacriﬁced by overly aggressive antitrust enforcement, their criticism
was not of the Court’s structural approach but rather of the low thresh-
olds for illegality.7It may surprise many that the leading proponents for consideringefﬁciencies in merger evaluation came in the 1970s, not from Chicago,
but from Harvard. Assistant Attorney General (AAG) Donald Turner,
who had taught antitrust at Harvard for ten years before joining the U.S.
Department of Justice (DOJ), included a very narrow efﬁciencies defense
in the ﬁrst Merger Guidelines based on the work of Oliver Williamson,
a young economist. Little use was made of this defense, however, until
the 1980s, when merger law, stimulated by the 1982 Baxter guidelines,
began to shift decisively toward incorporating non-market share factors
in merger analysis. The ﬁrst major widening of the efﬁciencies defense
occurred in 1984 when DOJ, under the leadership of J. Paul McGrath,
completely rewrote the efﬁciency section of the Merger Guidelines in a
way that transformed efﬁciencies from a defense, like the failing company
doctrine, into an integral part of the competitive effects analysis.
McGrath’s work endured largely unchanged through the 1992 joint
DOJ/Federal Trade Commission (FTC) Merger Guidelines until 1997,
when the Agencies revised the Guidelines to detail the tools they had
developed to evaluate efﬁciency claims based on thirteen years of experi-
ence applying the McGrath framework.and render markets more rather than less competitive”). See generally ABA Section of
Antitrust Law, Antitrust Law Developments (4th ed. 1997).6Brown Shoe Co. v. U.S., 370 U.S. 294 (1962).7See, e.g., Richard A. Posner, Antitrust Law: An Economic Perspective 111–13(2d ed. 2001); Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself
126–27 (1978).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal210This article is a history of the progression of efﬁciencies in horizontalmerger analysis.8It shows, as Oliver Williamson predicted in 1968, that“once economies are admitted as a defense, the tools for assessing these
effects can be expected progressively to be reﬁned.”9That is exactlywhat has happened, and as their tools have been reﬁned, the agencies’
conﬁdence in those tools has likewise grown, making the agencies more
comfortable weighing potential efﬁciency gains against potential market
power losses. This article also shows the inﬂuence the Guidelines have
had on gaining judicial acceptance of the importance of efﬁciencies in
determining whether a merger is likely substantially to lessen competi-
tion. And, ﬁnally, it shows the inﬂuence of the Guidelines in causing
other jurisdictions to recognize that efﬁciencies should play a central
role in merger review.II. THE EARLY CASE LAWModern merger law in the United States began with the 1950 passageof the Celler-Kefauver Act, which substantially broadened the reach of
section 7 of the Clayton Act. The ﬁrst cases under the amended Section
7 reached the Supreme Court during the peak of the Warren Court.
During this period the Court showed a strong bias toward developing
per se rules whenever possible, thus obviating a case-by- case balancing
of the anticompetitive and procompetitive effects of the kind required
under the rule of reason.108Although efﬁciencies are equally important to antitrust review of vertical and othernonhorizontal mergers, those mergers are beyond the scope of this article. It has been
understood since 1951 that vertical integration, whether by merger or internal growth,
can enhance allocative efﬁciency by solving the double mark-up problem. See Lionel W.
McKenzie, Ideal Output and the Interdependence of Firms, 61 Econ. J. 785–803 (1951). It has
also been understood since 1937 that bringing more functions within a single ﬁrm can
enhance efﬁciency when it is less costly to organize the transactions involved within the
ﬁrm than through open market exchanges. See Ronald Coase, The Nature of the Firm, 4
Economica 386 (1937), reprinted in Ronald H. Coase, The Firm, the Market, and the
Law (1988) (“A ﬁrm will tend to expand until the cost of organizing an extra transaction
within the ﬁrm becomes equal to the cost of carrying out the same transaction by means
of an exchange on the open market or the costs of organizing another ﬁrm.”); see generally
Oliver Williamson, Markets & Hierarchies(1975). This is what we would now referto as transactional efﬁciency. See Appendix. The courts have taken note of these efﬁciencies
in holding that a plaintiff must allege more than a de minimis foreclosure of rivals in
order to survive a motion to dismiss a challenge to a vertical merger. See, e.g., Alberta Gas
Chem. Ltd. v. E.I. du Pont de Nemours & Co., 826 F.2d 1235 (3d Cir. 1987). See generally
4A Phillip Areeda, Herbert Hovenkamp & Jon Solow, Antitrust Law 137–234 (rev.
ed. 1998).9Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Am.Econ. Rev. 18, 34 (1969).10See, e.g., U.S. v. Arnold, Schwinn & Co., 388 U.S. 365 (1967); U.S. v. Topco Assocs.,405 U.S. 596 (1972). Justice Potter Stewart famously wrote, “the only consistency is thatWorld Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies211This bias permeated the Warren Court’s Section 7 jurisprudence andshaped its initial approach to efﬁciencies in merger cases. Brown Shoe,11the ﬁrst merger case to reach the Supreme Court under the amended
section 7, came very close to rejecting even the possibility of an efﬁcien-
cies defense. After acknowledging that the House committee report for
the Celler-Kefauver Act had explicitly stated that the statute was not
intended to block a merger between two small companies that would
enable them to compete more effectively against larger ﬁrms—a concept
that seems to invite an efﬁciencies defense—the Court concluded that
Congress had nevertheless struck the balance in favor of competition
over efﬁciency:But we cannot fail to recognize Congress’ desire to promote competi-
tion, through the protection of viable, small, locally- owned business.
Congress appreciated that occasional higher costs and prices might
result from the maintenance of fragmented industries and markets. It
resolved these competing considerations in favor of decentralization.”12Similarly, in its 1963 decision in Philadelphia National Bank,13the Courtagain indicated a hostility toward efﬁciency arguments: “a merger the
effect of which ‘may be substantially to lessen competition’ is not saved
because, on some ultimate reckoning of social or economic debits and
credits, it may be deemed beneﬁcial.”14The Warren Court’s antipathy toward efﬁciencies rose to new levelsin its 1967 decision ﬁnding unlawful Procter & Gamble’s (P&G) acquisi-
tion of Clorox.15There, the Court in dicta again seemed to dismiss theidea of an efﬁciencies defense, stating that, “[p]ossible economies cannot
be used as a defense to illegality. Congress was aware that some mergers
which lessen competition may also result in economies, but it struck the
balance in favor of protecting competition.”16Indeed, the P&G decisionseemed to treat efﬁciencies more as an offense than as a defense.17Inthe government always wins.” U.S. v. Von’s Grocery Co., 384 U.S. 270, 301 (1966) (Stewart,
J., dissenting).11Brown Shoe Co. v. U.S., 370 U.S. 294 (1962).12Id. at 344.13U.S. v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963).14Id. at 371.15FTC v. Procter & Gamble Co., 386 U.S. 568 (1967).16Id. at 580.17In his concurring decision, Justice Harlan disagreed with the Court’s treatment ofefﬁciencies. He wrote: “The Court says Congress chose competition over economies, but
didn’t consider ‘whether certain economies are inherent in the idea of competition.’ If
the effect of a merger on market-structure seems anticompetitive, the agency should weigh
possible efﬁciencies arising from the merger . . . to determine whether, on balance, competition has
been substantially lessened.” Id. at 597 (emphasis added).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal212ﬁnding P&G’s acquisition of Clorox unlawful, the Court relied in part on
the FTC’s ﬁnding that the merger would “entrench” Clorox’s dominant
position in the bleach market because P&G would be able to advertise
Clorox jointly with its other products, thus reducing its advertising costs.18Today, reductions in advertising costs are viewed as an efﬁciency.III. THE 1968 MERGER GUIDELINESAlthough they are now almost forgotten in the mists of history, the1968 Merger Guidelines, which were released on the last day of Donald
Turner’s tenure as AAG for Antitrust, began the transformation of the
role of efﬁciencies in merger analysis.19Turner was widely recognizedas one of the preeminent antitrust scholars of his generation, and is still
the only Ph.D.-trained economist to serve as head of the Antitrust Divi-
sion. When he became AAG, Turner selected Oliver Williamson, then
a relatively young economist teaching at the University of Pennsylvania,
to be his Special Economic Assistant. One of Williamson’s projects was
to study the role of efﬁciencies in merger review.20The paper Williamsondrafted became the basis for his seminal 1968 article, Economies as an
Antitrust Defense: The Welfare Tradeoffs.21The article explains that a mergerthat yields nontrivial real economies will only have a net negative alloca-
tive effect if it produces substantial market power resulting in relatively
large price increases.22He also showed that cost savings almost alwaysbeneﬁt consumers because even a monopolist would pass some portion
of any cost savings on to its customers, unless its demand function
was perfectly inelastic. Williamson argued, therefore, that “a rational
treatment of the merger question requires that an effort be made to
establish the allocative implications of the scale economies and market
power effects of the merger” in determining whether it should be
found unlawful.23Williamson’s work prompted Turner to incorporate into the 1968Merger Guidelines a limited efﬁciencies defense. In particular, the 196818Id. at 574.19U.S. Dep’t of Justice, Merger Guidelines § 10 (1968), reprinted in 2 Trade Reg. Rep.(CCH) ¶ 4510 [hereinafter 1968 Merger Guidelines]. Turner’s deputy for policy planning,
Robert A. Hammond, led the Guidelines project. His team included future Supreme Court
Justice Stephen Breyer and future Assistant Attorney General for Antitrust Donald Baker.20Insight into Williamson’s role at the DOJ was provided by James S. Campbell, whoserved as an assistant to Turner.21Williamson, supra note 9.22Id. at 21. Williamson then introduced a number of qualiﬁcations to his model showingthat complicating the model did not detract from the conclusions drawn from it.23Id. at 18–19.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies213Guidelines recognized that in some “exceptional circumstances” efﬁ-
ciencies might justify a merger that would otherwise be subject to
challenge:10. Economies. Unless there are exceptional circumstances, the Depart-
ment will not accept as a justiﬁcation for an acquisition normally subject
to challenge under its horizontal merger standards the claim that the
merger will produce economies.24This acknowledgment is remarkable given the antipathy toward efﬁ-ciencies found in the Warren Court decisions of the same era. For the
DOJ to break ranks with the Court and to say that efﬁciencies are good,
not bad, and that it would take them into consideration in appropriate
cases was an important step toward introducing greater economic ratio-
nality into merger law.The 1968 Merger Guidelines gave three reasons for limiting the consid-eration of efﬁciencies to exceptional circumstances:(i) the Department’s adherence to the standards will usually result in
no challenge being made to mergers of the kind most likely to involve
companies operating signiﬁcantly below the size necessary to achieve
signiﬁcant economies of scale; (ii) where substantial economies are
potentially available to a ﬁrm, they can normally be realized through
internal expansion; and (iii) there usually are severe difﬁculties in
accurately establishing the existence and magnitude of economies
claims for a merger.25Adherents to the Chicago School objected to even this narrow anefﬁciencies defense. They argued that, rather than considering efﬁcien-
cies on a case-by- case basis, the thresholds for challenging mergers should
be set signiﬁcantly higher and no merger-speciﬁc efﬁciencies defense
should be allowed.26Their principal argument against an efﬁciencydefense was that it would be ” an intractable subject for litigation.”27A. Practice Under the 1968 Merger GuidelinesNot surprisingly, given the Supreme Court’s apparent hostility to efﬁ-ciencies, parties made little use of efﬁciency arguments in efforts to
justify mergers for the ﬁrst ﬁve years following issuance of the 1968
Guidelines. This began to change following the Supreme Court’s General241968 Merger Guidelines, supra note 19, § 10.25Id.26See, e.g., Posner, supra note 7, at 111–13. Posner proposed that a merger should notbe challenged unless it produced a market in which the top four ﬁrms had a 60% or
greater share.27Id. at 112.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal214Dynamics decision in 1974.28General Dynamics was the ﬁrst time mergerparties successfully rebutted the government’s prima facie market share
case by showing that other industry factors established that the merger
would not substantially lessen competition. The parties proved that
uncommitted reserves were a better indicator of a ﬁrm’s future ability
to compete in the coal industry than its historic share of sales. Because
the acquired ﬁrm had essentially no uncommitted reserves, its elimina-
tion would not materially lessen competition. That decision gave rise to
what came to be known (somewhat loosely) as the “General Dynamics
defense” and encouraged parties to begin advancing efﬁciency
arguments.29The narrow opening to an efﬁciencies defense offered by GeneralDynamics was widened over the next ﬁve years by a series of non-merger
Supreme Court decisions. In GTE Sylvania,30the Court overruled itsdecision in Schwinn,31holding that nonprice vertical restraints shouldbe evaluated under the rule of reason because they “promote interbrand
competition by allowing the manufacturer to achieve certain efﬁciencies
in the distribution of his products.”32In BMI,33the Court held that evena horizontal agreement among competitors should not be characterized
as per se unlawful unless “the practice facially appears to be one that
would always or almost always tend to restrict competition and decrease
output” and is not “designed to ‘increase economic efﬁciency and render
markets more rather than less competitive.’”34Armed with these precedents, parties began increasingly in the late1970s and early 1980s to include efﬁciencies arguments in presentations
to the agencies in merger investigations. The two examples below are
drawn from the private practice experience of one of the authors during
those years.The ﬁrst involved Ford’s proposed acquisition of a 35 percent equityinterest in Toyo Kogyo, the Japanese company that makes Mazda automo-28U.S. v. General Dynamics Co., 415 U.S. 486 (1974).29For example, in International Harvester, the Seventh Circuit held that the acquiredﬁrm’s ﬁnancial condition forced it to pay more for capital, placing it at a competitive
disadvantage to its larger rivals, and that the merger would be efﬁciency- enhancing because
it would reduce the acquired ﬁrm’s cost of capital and would give the acquiring ﬁrm the
ability to market tractors incorporating the acquired ﬁrm’s superior technology. U.S. v.
International Harvester Co., 564 F.2d 769 (7th Cir. 1977).30Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 35 (1977) (GTE Sylvania).31U.S. v. Arnold, Schwinn & Co., 388 U.S. 365 (1967).32GTE Sylvania, 433 U.S. at 54.33Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1 (1979).34Id. at 20. Signiﬁcantly, neither of these cases involved production cost savings; rather,both involved transactions cost savings. In GTE Sylvania, the nonprice restraints were a
more efﬁcient way to solve the free rider problem than elaborate contracts would haveWorld Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies215biles. At the time, Ford was the second largest U.S. automaker with
roughly 20 percent of the U.S. market and Mazda had a small, but
growing, share of roughly one percent. These shares were high enough
to have justiﬁed a challenge under the 1968 Merger Guidelines. In
persuading the FTC not to challenge the transaction, Ford hired Oliver
Williamson to help explain that the equity interest was part of a broader
strategic alliance between Ford and Mazda pursuant to which Mazda
would be supplying a critical component (the transaxle) for a new plat-
form Ford was developing. This platform, which was ultimately sold in
the United States under the Escort nameplate, was designed as the ﬁrst
“world car”—that is, it would be manufactured by Ford at its plants all
over the world and not just in North America. Using transactions cost
economics, Williamson showed that the equity interest was necessary to
align Ford’s and Mazda’s interests and to reduce the risk to Ford that
Mazda might engage in opportunistic behavior in the form of a hold-
up once Ford became dependent on it for this critical component.
Ford also showed that it expected to realize substantial efﬁciencies from
outsourcing this component to Mazda rather than producing it itself.
Based in part on these arguments, the FTC allowed the transaction to
proceed without a challenge, although it did insist initially that Ford put
some ﬁrewalls in place to limit its ability to inﬂuence Mazda’s competitive
decisionmaking with respect to the sale of automobiles in the United
States.The second example involved an acquisition of the nickel cadmiumbattery business of an American company, Gould, Inc., by the U.S. subsid-
iary of a major French nickel cadmium battery manufacturer, SAFT
America. The parties ﬁrst attempted the transaction in 1980, but the
DOJ challenged it and the parties abandoned the transaction on the eve
of the preliminary injunction hearing. After William Baxter became
AAG, the parties renewed their efforts to secure clearance for the transac-
tion. The task appeared daunting, as the U.S. market had only four
players, with Gould the second largest with a 22 percent share. The
largest ﬁrm, GE, had over a 60 percent share and the third ﬁrm, Union
Carbide, had slightly over 10 percent, but was rapidly losing ground.
SAFT was a new entrant in the United States, where its share was small
but growing, but it was one of the largest producers worldwide. The
parties hired George Stigler, a future Nobel prize winner, as their eco-
nomic expert. With the help of a short but elegant white paper by Stigler,
the parties were able to persuade DOJ not to challenge the transaction
a second time, arguing that the economies of scale were very large
relative to the small size of the market and that a combined Gould/been. And in BMI, the blanket license reduced the transactions costs associated with
negotiating and monitoring individual licenses.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal216SAFT would be a more formidable competitor to the dominant ﬁrm,
GE, than they were separately.Donald Turner worked with Williamson on the Ford/Toyo Kogyoinvestigation. He was also, at the time, writing Volume IV of the enor-
mously inﬂuential normative treatise on antitrust law he co-authored
with Phillip Areeda. Volume IV dealt with mergers and was published
in 1980. In it, Areeda and Turner became the ﬁrst widely respected
antitrust legal scholars to argue in favor of incorporating efﬁciencies
into the merger review process on a broader scale than the 1968 Merger
Guidelines contemplated.35In their treatise, Areeda and Turner picked up the Williamsoniantheme that “one cannot formulate rational antitrust rules without consid-
ering how they help or hinder more efﬁcient production and more
efﬁcient resource allocation.”36With this premise, they argued that “thecase for an economies defense is a strong one,” for three reasons.37First,mergers of inefﬁciently small ﬁrms are unlikely to impair competition
and may even intensify it. Second, even if price competition were lessened
as a result of an efﬁciency- enhancing merger, the detrimental effect
may be more than offset by the beneﬁcial welfare effect of greater
efﬁciency. Third, preventing an efﬁciency- enhancing merger is likely to
be futile because the inefﬁcient ﬁrms will likely disappear from the
market through attrition, leaving the market just as concentrated as the
merger would have made it.Areeda and Turner showed that there was nothing in the statutorylanguage, the legislative history, or the prior court decisions that would
foreclose an efﬁciencies defense.38In this regard, Areeda and Turneralso explained that it was something of a misnomer to refer to the role
of efﬁciencies as a “defense:”Although we have, to be sure, spoken of an economies “defense,” it is
not as a defense to a ﬁnal conclusion that a merger “lessens competition”
or is “illegal.” Rather, the “defense” terminology refers to the rebuttal
of a ﬁrst order inference from a portion of the evidence (such as market35Phillip A. Areeda & Donald F. Turner, Antitrust Law: An Analysis of AntitrustPrinciples and Their Application 146–99 (1980). The same year a then-unknown young
academic also published an article arguing in favor of a broader efﬁciencies defense.
Timothy J. Muris, The Efﬁciency Defense Under Section 7 of the Clayton Act, 30 Case W. Res.
L. Rev. 381 (1980).36Areeda & Turner, supra note 35, at 146.37Id. at 146.38Id. at 153.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies217shares) that a merger presumptively lessens competition and violates
the statute. That is, it is a defense to a prima facie case.”39In the remainder of their thirty-three-page section on efﬁciencies(which subsequent editions have expanded) Areeda and Turner pro-
vided what remains to this day the most complete guidebook available
on how to apply an efﬁciencies defense in practice.In contrast to Areeda and Turner, Chicago School adherents contin-ued to argue that practical difﬁculties made it inadvisable to create
an efﬁciencies defense. In his inﬂuential book, The Antitrust Paradox,
published in 1978, Professor Bork recycled his earlier articles that argued
that the measurement of efﬁciencies was “beyond the capacities of the
law.”40Bork maintained that, even if the claimed efﬁciencies could bequantiﬁed, the problem of then having to balance them against any
potential increase in market power resulting from a merger in order to
determine the likely net effect on price and output would be “utterly
insoluable.”41IV. 1982 MERGER GUIDELINESIn 1981, shortly after becoming AAG, William Baxter announced thathe planned to issue new guidelines to replace the 1968 Merger Guide-
lines. The ABA Section of Antitrust Law formed a task force to develop
proposed guidelines to submit to the DOJ.42Following Areeda andTurner’s lead, the task force recommended that the new guidelines
include efﬁciencies in their competitive effects analysis. The task force
was careful not to argue that potential efﬁciencies should be traded off
against a substantial lessening of competition, advocating only that they
should be used to rebut the presumption of illegality based on market
concentration and shares. The task force also argued that efﬁciencies
should inﬂuence the outcome only when the inference of anticompeti-
tive effect that could be drawn from market concentration and shares
was relatively weak (which it argued should be the case if the combined
shares were less than 30 percent).The DOJ declined to follow this recommendation. Although the DOJraised the market share and concentration thresholds at which a chal-
lenge was likely, the efﬁciencies section of the 1968 Guidelines was39Id. at 153–54.40Bork, supra note 7, at 126–27.41Id. at 126.42Steven M. Edwards et al., Proposed Revisions of the Justice Department’s Merger Guidelines,81 Colum. L. Rev. 1543 (1981). One of the authors served as a member of the task force.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal218retained largely unchanged.43Just as the 1968 Guidelines had limitedthe consideration of efﬁciencies to “exceptional circumstances,” the 1982
Merger Guidelines provided that the DOJ would consider efﬁciencies
only in “extraordinary cases,” arguably an even more restrictive stan-
dard.44The 1982 Merger Guidelines gave basically the same reasons fornot considering claims of “speciﬁc efﬁciencies” more broadly as the
1968 Guidelines had. First, they argued that the numerical market share
thresholds for challenging mergers were sufﬁciently high so that, “[i]n
the overwhelming majority of cases, the Guidelines will allow ﬁrms to
achieve available efﬁciencies through mergers without interference from
the Department.”45Second, they argued that efﬁciencies “are far easierto allege than to prove,” and that, even where they exist, “their magni-
tudes would be extremely difﬁcult to determine.”46The 1982 MergerGuidelines also tilted the playing ﬁeld even further against efﬁciencies
by treating efﬁciencies as an afﬁrmative defense, like the failing company
doctrine, and not as part of the agency’s competitive effects analysis.In a footnote, the 1982 Merger Guidelines established four prerequi-sites to any efﬁciencies claim. The DOJ required: (1) “clear and convinc-
ing evidence,” (2) in the form of “substantial cost savings resulting from
the realization of scale economies, integration of production facilities,
or multi-plant operations,” (3) that “are already enjoyed by one or more
ﬁrms in the industry,” (4) where “equivalent results could not be achieved
within a comparable period of time through internal expansion or a
merger that threatened less competitive harm.” Even where these pre-
requisites were met, the Guidelines provided that efﬁciencies would only
be considered in “otherwise close cases.”47The 1982 Merger Guidelines, therefore, essentially followed the Chi-cago School approach to efﬁciencies rather than the Areeda-Turner
Harvard School approach. As the Chicago School adherents had urged,
the Guidelines indirectly considered efﬁciencies by setting what then
were viewed as relatively high market share thresholds for challenges,48but showed a reluctance to consider speciﬁc efﬁciency claims in individ-
ual cases. Tyler Baker, one of the principal authors of the Guidelines,
has written that at the time “there was no constituency among the lawyers43U.S. Dep’t. of Justice, Merger Guidelines § 10.A. (1982), reprinted in 4 Trade Reg.Rep. (CCH) ¶ 13,102 [hereinafter 1982 Merger Guidelines].44Id.45Id.46Id.47Id.48Thomas E. Kauper, The 1982 Horizontal Merger Guidelines: Of Collusion, Efﬁciency, andFailure, 71 Cal. L. Rev. 497 (1983).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies219or the economists at the Division for any materially different statement
of policy.”49On the same day the 1982 DOJ Merger Guidelines were issued, theFTC issued a Statement on Horizontal Mergers.50The FTC Statementtook a slightly more favorable view of efﬁciencies. It indicated that the
FTC would consider “measurable operating efﬁciencies” in exercising
its prosecutorial discretion, but that they would not be treated as a legally
cognizable defense. The FTC stated that in considering efﬁciencies in
the exercise of its prosecutorial discretion it would require “substantial
evidence” showing cost savings that “clearly outweigh” any increase in
market power.V. 1984 MERGER GUIDELINESThe efﬁciencies section of the 1982 Merger Guidelines was one oftwo sections of the Guidelines that were substantially revised in 1984 as
a direct result of the DOJ’s experience in reviewing the LTV-Republic
steel merger.51After an initial challenge, the DOJ settled the case toallow the merger with divestment of two steel mills.52In approving thesettlement over a number of objections, the court noted the “weakened
and deteriorating condition” of the U.S. steel industry and found that
approving the settlement would be in the public interest because it would
allow a merger to proceed which was designed “to achieve savings in
cost through efﬁciencies which will enable the surviving company to
compete more effectively both here and in export markets.”5349Tyler A. Baker, The 1984 Justice Department Guidelines, 53 Antitrust L.J. 327, 333 (1984).50James E. McCarty, 467 PLI/CORP 213, 225 (1984).51U.S. Dep’t of Justice Merger Guidelines § 3.5 (1984), reprinted in 4 Trade Reg. Rep(CCH) ¶ 13,103 [hereinafter 1984 Merger Guidelines]. The other section revised dealt
with the treatment of imports. In addition, there were other, minor changes. J. Paul
McGrath, the AAG at the time, credits his deputy, Charles F. Rule, for leading the team
responsible for the revisions.52The Department initially challenged the merger in its entirety, alleging that it waslikely substantially to lessen competition in three markets: (1) carbon and alloy hot rolled
sheet and strip steel, (2) carbon and alloy cold rolled sheet and strip steel, and (3) stainless
cold roll sheet and strip steel. The Department found that while imports could have
important competitive effects in the domestic market, trade restrictions limited such import
competition. The Department also found that the efﬁciencies the parties claimed were
not sufﬁcient to overcome the serious potential anticompetitive effects from a merger
that would produce post-merger HHIs in two relevant markets of 1,100 and 1,000.In explaining his decision to accept the settlement, AAG McGrath said that the partieshad provided “very persuasive evidence that the combined operation of several plants
could have, and indeed should have, and probably would have resulted in substantial cost
savings” and that this “was a factor that led to the Department’s approval of a restructured
transaction.” 60 Minutes with J. Paul McGrath—Interview, 54 Antitrust L.J. 131, 141 (1985).53U.S. v. LTV Corp., 1984 WL 21973, *14 (D.D.C. Aug. 2, 1984).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal220Echoing these sentiments, the DOJ made four major changes to thetreatment of efﬁciencies in the Guidelines. DOJ noted that “the efﬁ-
ciency- enhancing potential of mergers can increase the competitiveness
of ﬁrms and can result in lower prices to consumers,”54and explainedthat changes were necessary because the language of the 1982 Guidelines
“has a restrictive, somewhat misleading tone” suggesting that DOJ “would
explicitly consider efﬁciency claims only in ‘extraordinary cases,’”
whereas “[i]n practice, the Department never ignores efﬁciency claims.”55The revisions, it said, were intended to correct this misimpression and
to provide further guidance as to how efﬁciencies would be evaluated.First, the efﬁciencies section of the Guidelines was moved from the“defenses” section to the “competitive effects” section. Then-AAG Paul
McGrath himself emphasized the importance of this shift:In looking at a given proposed merger, particularly one that is some-
place near those thresholds, we look a good deal harder at other sur-
rounding circumstances to come up with an overall assessment as to
whether the proposed merger . . . is likely to lessen competition. One
of those factors we consider is efﬁciencies, and I remind you that in
the 1984 Guidelines efﬁciencies are listed as another factor, rather than
as a defense.56McGrath added that under this approach the DOJ would not “balance
expected efﬁciencies against expected anticompetitive consequences.”57Instead, borrowing from Areeda-Turner, he said the Division would look
at efﬁciencies in determining whether the merger was anticompetitive
at all.58McGrath added that he expected this to be the exception ratherthan the rule: “It does not happen very often that a ﬁrm comes in with
very good proof that such efﬁciencies will result.”59Second, the 1984 revision added an introductory paragraph that explic-itly acknowledged that “the primary beneﬁt of mergers to the economy
is their efﬁciency- enhancing potential, which can increase the competi-
tiveness of ﬁrms and result in lower prices to consumers.”60This para-graph went on to recite, however, just as the earlier versions had, that
because the Guidelines proscribed only mergers that present a signiﬁcant
danger to competition, they would “in the majority of cases . . . allow541984 Merger Guidelines, supra note 51, § 3.5.55U.S. Dep’t of Justice, Press Release, 1984 Merger Guidelines, 1984 WL 304008 ( June14, 1984).5660 Minutes With J. Paul McGrath, supra note 52, at 141.57Id.58Id.59Id.601984 Merger Guidelines, supra note 51, § 3.5.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies221ﬁrms to achieve available efﬁciencies through mergers without interfer-
ence from the Department.”61Third, the 1984 version expanded its explanations of the criteria theDepartment would use in evaluating claimed efﬁciencies. Speciﬁcally,• While eliminating the language that said the Department wouldconsider efﬁciencies only in “extraordinary” cases, the revisions
retained the 1982 requirement that efﬁciencies be established by
“clear and convincing evidence.”62• In place of the requirement that the parties prove that “equivalentresults could not be achieved within a comparable period of time
through internal expansion or through a merger that threatened
less competitive harm,” the revisions substituted a somewhat looser
requirement that the merger be “reasonably necessary” to achieve
the efﬁciencies.63• Whereas the 1982 Guidelines had required that the efﬁciencies be“substantial,” the 1984 Guidelines required that the efﬁciencies be
“signiﬁcant,” a somewhat more ﬂexible standard.64• Instead of providing that efﬁciencies would be considered “only inresolving otherwise close cases,” the 1984 Merger Guidelines indi-
cated that the DOJ would use a sliding scale to evaluate efﬁciencies
so that the more signiﬁcant the competitive risks, the higher the
level of efﬁciencies the parties would be required to establish.• The revisions eliminated the language from the 1982 Merger Guide-lines that required the parties to show that the efﬁciencies were
“already enjoyed by one or more ﬁrms in the industry.”65The fourth, and ﬁnal, change, was the inclusion of a more comprehen-sive list of the types of efﬁciencies DOJ would consider. The 1982 Merger
Guidelines had limited consideration to “substantial cost savings resulting
from the realization of scale economies, integration of production facili-
ties, or multi-plant operation.”66The 1984 Guidelines adopted the less-restrictive formulation that “[c]ognizable efﬁciencies include, but are
not limited to,” these particular efﬁciencies, and stated that DOJ would
also consider “similar efﬁciencies relating to speciﬁc manufacturing,61Id.62Id.63Id.64Id.651982 Merger Guidelines, supra note 43, § 5.A.66Id.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal222servicing, or distribution operations of the merged ﬁrm,” as well as
those “resulting from reductions in general selling, administrative, and
overhead expenses.”67At the time of these changes, many characterized the shift to a “quali-ﬁedly hospitable”68approach to efﬁciencies as “dramatic,”69claiming theagency had “virtually reversed course.”70They attributed the change to“the political and public relations beating taken by the DOJ over its
initial handling of the Jones and Loughlin-Republic merger.”71Theauthors of the 1982 Merger Guidelines, including both Bill Baxter and
Tyler Baker, “question[ed] the wisdom of the change,”72fearing that itwould “lead to undue political inﬂuence in the enforcement process.”73Looking back nearly twenty years later, we can see that the changefrom 1982 to 1984 was indeed signiﬁcant. It moved DOJ from the Chicago
camp, which opposed consideration of merger-speciﬁc efﬁciencies as
unmanageable, to the Harvard camp, represented by Areeda-Turner,
which (inspired by Williamson) argued that rational antitrust policy
required doing no less. Whether the changes were driven by political
considerations or not is unimportant. What is more important is that
they contributed importantly toward fully integrating efﬁciencies into
modern merger analysis.VI. 1980S FEDERAL TRADE COMMISSION PRACTICEAlthough the FTC did not follow the DOJ’s lead and revise its 1982Merger Policy Statement, the FTC began to assign greater weight to
efﬁciencies in its decision making, and parties more frequently made
efﬁciency arguments. In a 1984 hospital merger decision, the FTC went
out of its way to explain that prior judicial decisions did not foreclose
consideration of efﬁciencies in evaluating the competitive effects of
mergers, relying largely on arguments developed in a 1980 law review
article by Timothy Muris, who recently had become Director of the
Bureau of Competition.74Nonetheless, in that case the FTC afﬁrmed671984 Merger Guidelines, supra note 51, § 5.A.68Ronald W. Davis, Antitrust Analysis of Mergers, Acquisitions and Joint Ventures in the 1980s:A Pragmatic Guide to Evaluation of Legal Risks, 11 Del. J. Corp. L. 25, 87 (1986).69David A. Clanton, Recent Merger Developments: Coming of Age Under the Guidelines, 53Antitrust L.J. 345, 351 (1984).70Id. at 351.71Davis, supra note 68, at 87.72Baker, supra note 49.73Davis, supra note 68, at 87.74See American Med. Int’l, Inc., 104 F.T.C. 1, 71–81 (1984); see also Muris, supra note 35.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies223the Administrative Law Judge’s determination that the parties had failed
to establish that any substantial efﬁciencies would ﬂow from its merger
or that they would inure to the beneﬁt of consumers.The same year, the FTC relied on efﬁciencies as one of its reasonsfor approving a production joint venture between General Motors and
Toyota to produce small cars in North America, subject to a consent
order imposing restrictions on the output of the joint venture and safe-
guards on information sharing between the parties.75The Commissionfound that the venture, which it said it might otherwise not have allowed
to proceed, would produce three procompetitive beneﬁts: (1) it would
increase the number of small cars available in America; (2) the joint
venture would be able to produce these cars at a lower cost than GM
could through any alternative available to it; and (3) the venture would
offer GM an opportunity to learn more about efﬁcient Japanese manufac-
turing and management techniques that could help it lower its costs
generally. Although not a merger case, the GM/Toyota decision illustrated
that the FTC, like the DOJ, was becoming more receptive to efﬁciency
arguments. This naturally led parties to make such arguments more
frequently.To use another example drawn from the private practice experienceof one of the authors, in 1990, efﬁciency arguments played a key role
in securing FTC clearance, over serious staff objections, for a merger of
the two leading worldwide producers of turbo expanders, which are used
to liquefy gases. The merger created a ﬁrm with market shares, both in
the United States and globally, well in excess of 60 percent. The parties
argued that, despite these high market shares, the merger would not be
anticompetitive because (1) some of the buyers were vertically integrated
and the others could enter or sponsor entry into the turboexpander
market; (2) the acquired ﬁrm was in serious ﬁnancial jeopardy and might
otherwise have to exit the market; and (3) if it did so, its technology,
most of which was in the head of its eighty-four-year- old founder, might
be lost, whereas the merger would allow that technology to be transferred
to younger engineers at the acquiring ﬁrm (this was dubbed the
“Yoda defense”).76VII. 1980s JUDIC IAL PRECEDENTThe courts had little occasion following the 1982 and 1984 MergerGuidelines to consider efﬁciencies in a merger context. In 1986 in Cargill,75See General Motors Corp., 103 F.T.C. 374 (1984).76This efﬁciency argument focuses on a transactional efﬁciency stemming from thetransfer of technological know-how between two producers. Information-based assets pre-World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal224Inc. v. Monfort of Colorado, Inc.,77the Court implicitly overruled its earlierdecision in Procter & Gamble to the extent that decision might have been
understood to hold that a merger could be found to violate Section 7
because it would make an already leading ﬁrm more efﬁcient. Cargill
arose from a private action brought by a competitor seeking to enjoin
the proposed merger of two leading meat packers. The plaintiff claimed
it would be injured because the merger would produce “multiplant
efﬁciencies” that would enable the merged ﬁrm to lower prices in order
to compete for market share. The Supreme Court held that “it would
be inimical to the purposes of the antitrust laws” to enjoin a merger
because it would lead to increased efﬁciency and lower prices:To hold that the antitrust laws protect competitors from the loss of
proﬁts due to such price competition would, in effect, render illegal
any decision by a ﬁrm to cut prices in order to increase market share.
The antitrust laws require no such perverse result, for “[i]t is in the
interest of competition to permit dominant ﬁrms to engage in vigorous
price competition, including price competition.”78VIII. 1992 MERGER GUIDELINESIn 1992, the DOJ undertook an extensive revision of the 1984 MergerGuidelines, which the FTC joined for the ﬁrst time.79The principalchange of the 1992 Guidelines from earlier versions was to shift decision
making more fully away from structural presumptions based on market
shares and concentration ratios and to place greater emphasis on qualita-
tive competitive effects analysis, or what one of the revised Guidelines’
principal authors, Robert Willig, called “story telling.”80The 1992 Merger Guidelines left the language of the efﬁcienciessection unchanged from the 1984 version, with one exception. The one
change was the removal of the sentence that provided that efﬁciencies
would not be considered unless they were “established by clear and
convincing evidence.” In explaining the reason for this change, Kevinsent challenging monitoring and pricing problems for would-be transactors, and sometimes
no arrangement short of outright transferral of ownership over the asset—in this case, a
merger—can satisfactorily solve these problems. For further discussion of transactional
efﬁciencies, and their contrast with other categories of efﬁciencies, see the Appendix, infra.77479 U.S. 104 (1986).78Id. at 492 (quoting Arthur S. Langenderfer, Inc. v. S.E. Johnson Co., 729 F.2d 1050,1057 (6th Cir. 1984)).79U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal Merger Guidelines § 4(1992), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 [hereinafter 1992 Merger Guide-
lines].80See Charles A. James, Overview of the 1992 Horizontal Merger Guidelines, 61 AntitrustL.J. 447, 448, 452 (1993).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies225Arquit, who served as Director of the FTC’s Bureau of Competition when
the 1992 Guidelines were being drafted, argued that “no substantive
change was intended” by this change.81Eliminating the “clear and con-vincing evidence” standard, he said, was simply part of the effort to move
away from structural presumptions and not to assign burdens of proof.Despite Arquit’s protestations, the change was obviously signiﬁcant asit signaled a greater openness to considering efﬁciency arguments and
was so viewed by many in the bar at the time. Given the uncertainties
inherent in trying to predict the likely effect of a merger, how high a
standard of proof is required will often be determinative.And, indeed, after the 1992 Merger Guidelines, the agencies continuedto gain experience reviewing efﬁciencies, as merging parties continued
to make efﬁciencies claims in merger investigations.82Scholars and prac-titioners also continued to offer critical commentary about the treatment
of efﬁciencies in the Guidelines.83In 1992, Robert Pitofsky published a widely noted article advocatingbroader use of efﬁciencies in merger reviews.84Tying efﬁciencies to thecompetitiveness of U.S. ﬁrms in an increasingly global economy, Pitofsky
argued that, “in some market situations, consideration of [efﬁciency]
factors . . . could make a signiﬁcant difference in the ability of ﬁrms to
compete in international trade.”85He argued further that “efﬁcienciesdo not lessen—indeed they often improve—competition” and that con-
sideration of efﬁciencies could be consistent with section 7’s “substantial
lessening of competition” analysis.86He proposed an efﬁciencies defense“where the likelihood of realizing efﬁciencies is maximized and the
likelihood of consumer injury as a result of an increase in market power is
minimized.”87Key features of his proposal were a focus on (1) production81Kevin J. Arquit, Perspectives on the 1992 U.S. Government Horizontal Merger Guidelines, 795PLI/CORP 33 (1992).82See, e.g., Federal Trade Comm’n, Anticipating the 21st Century: CompetitionPolicy in the New High-Tech, Global Marketplace: A Report by Federal Trade
Commission Staff, vol. I. ch. 2 at 14, 21 (1996) [hereinafter FTC Staff Report].83E.g., Gary L. Roberts & Steven C. Salop, Efﬁciencies in Dynamic Merger Analysis, 19World Competition L. & Econ. Rev. 5 (1996); Joseph Kattan, Efﬁciencies and Merger
Analysis, 62 Antitrust L.J. 513, 522–27 (1994); Steve Stockum, The Efﬁciencies Defense for
Horizontal Mergers: What Is the Government’s Standard?, 61 Antitrust L.J. 829 (1993).84Robert Pitofsky, Proposals for Revised United States Merger Enforcement in a Global Economy,81 Geo. L.J. 195 (1992).85Id. at 198.86Id. at 211, 247.87Id. at 218. His proposal was: “In any market where postmerger concentration is moder-ate, and the combined company after the merger would hold less than thirty-ﬁve percent
of the market, a horizontal merger should be legal if the defendants can clearly supportWorld Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal226efﬁciencies that reduce unit costs and (2) the inability to achieve the
efﬁciencies through less restrictive alternatives.IX. THE 1997 REVISIONSWhen Professor Pitofsky became FTC Chairman in 1995, one of hisearly initiatives was to revive the FTC’s prior practice of conducting
hearings on important issues of antitrust policy. Pursuing the concerns
addressed in his 1992 article, Chairman Pitofsky directed that the ﬁrst
hearings focus on the changing nature of competition in an increasingly
global and innovation-based economy.88Efﬁciencies became one of themain subjects addressed both at those hearings and in the ensuing FTC
staff report, Anticipating the 21stCentury: Competition Policy in the NewHigh-Tech, Global Marketplace Competition.89The report endorsed furtherintegrating efﬁciencies into the competitive effects analysis,90arguingthat efﬁciencies should “constitute a rebuttal [to a market-share-based
prima facie case], not an afﬁrmative defense.”91The FTC Report led to the formation of a joint FTC-DOJ task forceto consider the efﬁciencies issue and prepare revisions to the Guide-
lines.92The revisions issued in 1997 (1997 Revisions) entirely replacedthe section devoted to efﬁciencies. Nonetheless, the revised section was
presented as reﬂecting a more thorough explanation of existing practice
rather than a change in policy.93The 1997 Revisions retained the introductory language from the 1984and 1992 Guidelines declaring that “the primary beneﬁt of mergers to
the economy is their potential to generate . . . efﬁciencies.” The new
Section 4, however, explained in greater detail that the mechanism by
which efﬁciencies could increase the competitiveness of ﬁrms was by
“increasing their incentive and ability to compete.” It also expanded thethe claim that production efﬁciencies leading to a substantial reduction in unit costs
will result and these efﬁciencies could not be achieved through a much less restrictive
alternative.” Id. at 218. He rejected any pass-through requirement. Id. at 219.88Federal Trade Comm’n, Hearings on FTC Policy in Relation to the Changing Natureof Competition; Notice of Public Hearing and Opportunity for Comment, 60 Fed. Reg.
37,449 (1995) (issues included “treatment of efﬁciencies in merger and nonmerger areas”).89FTC Staff Report, supra note 82.90Id. Exec. Summ. at 2.91Id. ch. 2 at 25.92U.S. Dep’t of Justice, Press Release, Justice Department and Federal Trade CommissionAnnounce Revisions to Merger Guidelines (Apr. 8, 1997).93“The revisions better reﬂect existing practices at the agencies, and provide betterguidance to merging parties,” said Larry Fullerton, Deputy Assistant Attorney General for
Merger Enforcement in the Department’s Antitrust Division. Id.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies227list of beneﬁts to include “improved quality, enhanced service, or new
products” in addition to lower prices.94The ﬁrst major change of the 1997 Revisions was the provision of amore systematic explanation of when efﬁciencies would be viewed as
“cognizable” and therefore entitled to consideration. Cognizable efﬁ-
ciencies were deﬁned by three characteristics: “Cognizable efﬁciencies are
[1] merger-speciﬁc efﬁciencies that [2] have been veriﬁed and [3] do
not arise from anticompetitive reductions in output or service.”95A. Merger-Speciﬁc EfﬁcienciesThe revision deﬁned “merger-speciﬁc” efﬁciencies as “efﬁciencieslikely 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.”96This formulationis subtly different from the “reasonably necessary” standard of the earlier
guidelines in refocusing attention away from whether the efﬁciencies
“could” be accomplished without the merger to whether they would be
“likely” absent the merger.97The difference is much more signiﬁcant than it may at ﬁrst appear.There are any number of reasons why a ﬁrm may not pursue efﬁciencies
through internal means even if technically it would be feasible to do so.98For example, to the extent the efﬁciencies are a function of economies of
scale, a ﬁrm may not wish to add capacity to achieve those greater
efﬁciencies where the effect may be to further depress existing market
prices. Second, achieving the efﬁciencies through internal means may
be substantially more costly than by merger, reducing the return on
investment below necessary hurdle rates. Third, and perhaps most94U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal Merger Guidelines § 4(as amended Apr. 8, 1997), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 [hereinafter
1997 Revisions].95Id. § 4.96Id. The Guidelines elaborated this principle in two sentences. First, “[t]he Agencywill not deem efﬁciencies to be merger-speciﬁc if they could be preserved by practical
alternatives that mitigate competitive concerns, such as divestiture or licensing.” Id. § 4
n.35. Second, “[o]nly alternatives that are practical in the business situation faced by the
merging ﬁrms will be considered in making this determination; the Agency will not insist
upon a less restrictive alternative that is merely theoretical.” Id. § 4.97This shift brought the analysis of efﬁciencies into line with the treatment of entry,expansion, and repositioning in the 1992 Merger Guidelines, as to all of which the
guidelines make the likelihood, not merely the feasibility, of those changes occurring the
relevant criterion.98See William J. Kolasky, Lessons from Baby Food: The Role of Efﬁciencies in Merger Review,Antitrust, Fall 2001, at 82.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal228important, to the extent the efﬁciencies result from combining the com-
plementary assets of the two merging ﬁrms, which could theoretically
also be done by contract, transactions costs may form an obstacle to
achieving these efﬁciencies other than through merger.99In addition,to the extent joint ventures or other competitor collaborations are viewed
as a potentially less restrictive alternative to merger, the 1997 Revisions
properly focus attention on the incentive and cooperation problems
inherent in such collaborations.100B. Not AnticompetitiveThe 1997 Revisions do not elaborate on the statement that mergerefﬁciencies are not cognizable if they “arise from anticompetitive reduc-
tions in output or service.”101It is true that reductions of output, forexample, will normally be accompanied by reductions in (total) costs,
but this cost reduction is not an efﬁciency. Similarly, elimination of
rivalry between the merging ﬁrms may mean that the merged ﬁrm may
be able to cut its cost of acquiring customers or to spend less in providing
service to its customers. To the merging ﬁrms, such changes certainly
represent cost savings and merging ﬁrms sometimes mistakenly try to
treat these savings as efﬁciencies. This provision reminds the reader
that the focus in analyzing efﬁciencies is on changes that improve, not
degrade, allocative efﬁciency.C. Veriﬁable EfﬁcienciesThe revisions require that efﬁciencies be veriﬁed to be cognizable.They explain this requirement on the grounds that “[e]fﬁciencies 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.”102Consequently, the Guidelines, as revised, provide:the merging ﬁrms must substantiate efﬁciency claims so that the Agency
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 ability99Contrary to the sometimes offered view that, because they fall short of a full merger,joint ventures necessarily are less anticompetitive than mergers, transaction cost obstacles
to achieving efﬁciencies could well lead to a situation in which a joint venture would raise
competitive concerns whereas a merger among the very same participants would not be
problematic because the merger was thought to lead to greater efﬁciency- enhancing
integration. See William Nye, Can a Joint Venture Lessen Competition More Than a Merger ?, 40
Econ. Letters 487 (1992).100We thank Gregory J. Werden for contributing this insight.1011997 Revisions, supra note 94, § 4.102Id.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies229and incentive to compete, and why each would be merger-speciﬁc.
Efﬁciency claims will not be considered if they are vague or speculative
or otherwise cannot be veriﬁed by reasonable means.103Signiﬁcantly, this language does not necessarily require that the efﬁcien-
cies be quantiﬁed in every case. Just as the market power effects of a
merger often cannot be measured precisely, so, too, some important
efﬁciencies, especially those relating to allocative, dynamic, and transac-
tional efﬁciencies, do not always lend themselves to precise estimation.Having deﬁned cognizable efﬁciencies, the 1997 Revisions nextaddress the issue of how these cognizable efﬁciencies will be taken into
account in the competitive effects analysis. They state that the agencies
“will not challenge a merger if cognizable efﬁciencies are of a character
and magnitude such that the merger is not likely to be anticompetitive
in any relevant market.”104They further explain that the agencies willconsider “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 that market.”105As in the 1984 and 1992Merger Guidelines, the 1997 Revisions provide for the use of a sliding
scale:The greater the potential adverse competitive effect of a merger . . .
the greater must be cognizable efﬁciencies in order for the Agency to
conclude that the merger will not have an anticompetitive effect in the
relevant market. When the potential adverse competitive effect of a
merger is likely to be particularly large, extraordinarily great cognizable
efﬁciencies would be necessary to prevent the merger from being anti-
competitive.106The 1997 Revisions sound an additional cautionary note in this regard:
“In the Agency’s experience, efﬁciencies are most likely to make a differ-
ence in merger analysis when the likely adverse competitive effects,
absent the efﬁciencies, are not great. Efﬁciencies almost never justify a
merger to monopoly or near-monopoly.”107103Id.104Id.105Id. (emphasis added).106Id. The Revisions also distinguish between the various types of efﬁciencies. TheRevisions indicate that “certain types of efﬁciencies are more likely to be cognizable
and substantial than others,” singling out “efﬁciencies resulting from shifting production
among facilities formerly owned separately, which enable the merging ﬁrms to reduce
the marginal cost of production.” By contrast, “those relating to research and develop-
ment[] are potentially substantial but are generally less susceptible to veriﬁcation and may
be the result of anticompetitive output reductions.” Others, such as “those relating to
procurement, management, or capital cost are less likely to be merger-speciﬁc or substan-
tial, or may not be cognizable for other reasons.”107Id.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal230One of the principal debates while the 1997 Revisions were beingformulated related to whether efﬁciencies had to be passed on to con-
sumers in order to be cognizable.108Most economists argued for whatthey called a “total welfare” approach, which would view all efﬁciencies
positively, whether or not they were passed on to consumers in the form
of lower prices. They argued that all resource savings beneﬁt society
and that any wealth transfer from consumers to producers should be
irrelevant because, put colloquially, producers are consumers in their
time off. Chairman Pitofsky himself took this view, both in his 1992
article and in comments he made while Chairman of the FTC prior to
the issuance of the 1997 Revisions.109Most commentators have interpreted the 1997 Revisions as adoptingnot this broader formation but rather a “consumer welfare” approach
to efﬁciencies, which counts efﬁciencies only to the extent they are likely
to be passed on to consumers in the form of lower prices and expanded
output. A close reading of the 1997 Revisions, however, shows that the
agencies preserved the possibility of weighing positively efﬁciencies that
would not immediately be passed on to consumers. The revisions did
not include a pass- on requirement in deﬁning cognizable efﬁciencies.
They specify that: “The Agency will also consider the effects of cognizable
efﬁciencies with no short-term, direct effect on prices in the relevant
market.”110It would probably be accurate, therefore, to call the approachtaken by the 1997 Revisions a hybrid consumer welfare/total welfare
model rather than one or the other.111Efﬁciencies that beneﬁt consumersimmediately through lower prices and increased output will receive the
most weight, but other efﬁciencies will also be considered, to the extent
they can be proved and can be shown ultimately to beneﬁt consumers.112108See, e.g., Paul L. Yde & Michael G. Vita, Merger Efﬁciencies: Reconsidering the “Passing-On” Requirement, 64 Antitrust L.J. (1996); Jerry A. Hausman & Gregory K. Leonard,
Efﬁciencies from the Consumer Viewpoint, 7 Geo. Mason L. Rev. 707 (1999); Craig W. Conrath
& Nicholas A. Widnell, Efﬁciency Claims in Merger Analysis: Hostility or Humility?, 7 Geo.
Mason L. Rev. 685 (1999).109Pitofsky, supra note 84; Roundtable Discussion with Enforcement Ofﬁcials, 63 AntitrustL.J. 951, 981 (1995).1101997 Revisions, supra note 94, § 4 n.37. The note cautions, however, that these beneﬁts“will be given less weight because they are less proximate and more difﬁcult to predict.”
Again, we thank Greg Werden for bringing the signiﬁcance of this footnote to our attention.111See Gregory J. Werden, An Economic Perspective on the Analysis of Merger Efﬁciencies,Antitrust, Summer 1997, at 12, 13–14 (suggesting that revision left open the question
whether the effect of efﬁciencies should be evaluated against “price effects” standard,
“consumer surplus” standard, or “total surplus” standard).112The DOJ’s economists have developed a simple method for determining when efﬁ-ciencies are likely to prevent price increases in the two standard unilateral effects models.
See Gregory J. Werden, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers
of Differentiated Products, 44 J. Indus. Econ. 409 (1996); Gregory J. Werden & Luke M.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies231In a footnote to the Revisions, the agencies addressed the possibilitythat a merger with anticompetitive effects in one market may have more
substantial efﬁciency- enhancing effects in another market or markets.113Because accepting a merger on such grounds would necessarily mean
accepting anticompetitive harm to some consumers, the footnote
explains that such mergers “normally” would be challenged, after a
market-by-market analysis. The footnote also provides, however, that a
merger might be accepted if the efﬁciencies are “inextricably linked” to
the anticompetitive harm—that is, the harm cannot be avoided in the
usual manner by a divestiture or other similar relief—and if the imbal-
ance is substantial (i.e., the efﬁciencies are large and the anticompetitive
effect small).A merger of two natural gas-gathering systems that the FTC clearedwhile it was working on the 1997 Revisions illustrates how these principles
apply in practice. Gathering systems transport natural gas from the well-
head to the nearest processing plant or transmission pipeline. This partic-
ular merger involved two companies that operated gathering systems
and processing plants in West Texas in the area around Midland-Odessa,
an area with very mature ﬁelds and declining production. The two merg-
ing systems were the only systems serving several counties west of Odessa,
making this a merger to monopoly in these counties.114The partiesnevertheless were able to obtain clearance by showing that only a handful
of producers were close enough to both systems to beneﬁt from competi-
tion between them whereas all producers served by the two systems would
beneﬁt from the very substantial economies that could be realized by
combining the two systems and their associated processing plants, both
of which were badly underutilized.X. JUDIC IAL RECOGNITION OF EFFIC IENC IESThe evolving treatment of efﬁciencies in the various versions of theMerger Guidelines has been inﬂuential in shaping the judicial treatmentFroeb, A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Homogeneous
Products, 58 Econ. Letters 367 (1998).1131997 Revisions, supra note 94, at n.36. The 1992 Merger Guidelines had not directlyaddressed this question, noting generally that “[s]ome mergers that the Agency otherwise
might challenge may be reasonably necessary to achieve signiﬁcant net efﬁciencies,” a
statement that does not address whether the efﬁciencies must be in the same market as
the anticompetitive effect.114The FTC deﬁnes the relevant geographic market for natural gas gathering in termsof the distance a gathering system will go to serve a new customer, which is typically only
a few miles. See, e.g., Phillips Petroleum Co., FTC Docket No. C-3634 (consent order
entered Dec. 29, 1995), available at 1995 WL 170 12700 (Dec. 28, 1995). Because of the
small size of the wells in question and the declining production in the area generally,
entry was also unlikely.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal232of efﬁciencies. Just as the agencies have, the courts increasingly have
begun to accept the idea that efﬁciencies may, in appropriate circum-
stances, be used to rebut a prima facie case of anticompetitive effect
based on market concentration. In addition, the courts have largely
adopted the analytical framework for evaluating efﬁciency claims that is
set out in the Guidelines.A. Circuit Court DecisionsAlthough the Supreme Court has not had an occasion to revisit theissue of whether efﬁciencies can be used as a defense in a merger case
since its early decisions, four circuits have considered the issue. All four
have shown a willingness to treat efﬁciencies as serving to rebut a prima
facie showing of anticompetitive effect based on market share and con-
centration and have generally applied the same analytical framework as
that embodied in the Merger Guidelines.1. FTC v. University Health, Inc.115The Eleventh Circuit was the ﬁrst court of appeals to hold squarely thatefﬁciencies may be used to rebut a prima facie showing of anticompetitive
effect.116The court did not cite the Guidelines in reaching this conclu-sion, but relied instead principally on the Areeda-Turner treatise and
other scholarly articles advocating an efﬁciencies defense. The approach
the court adopted nevertheless closely mirrored the then- extant 1984
Merger Guidelines. The court held that efﬁciencies should not be a
defense to a merger that was found to be anticompetitive, but should
instead be integrated into the competitive effects analysis, where they
could be used to rebut a prima facie case based on market share presump-
tions. In addition, the court held that in order to be considered, the
efﬁciencies would have to be “signiﬁcant” and “ultimately [to] beneﬁt
competition and, hence, consumers.”117Applying these standards, thecourt of appeals found that the parties had not presented sufﬁcient
evidence of efﬁciences and reversed the district court’s denial of a prelim-
inary injunction.1182. FTC v. Butterworth Health Corp.119In a 1997 per curiam decision afﬁrming the denial of a preliminaryinjunction, the Sixth Circuit rejected an FTC argument that the district115938 F.2d 1206 (11th Cir. 1991).116Id. at 1222.117Id. at 1223.118Id.119121 F.3d 708 (6th Cir. 1997).World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies233court had committed legal error in allowing the merging hospitals to
rebut the FTC’s prima facie case with evidence of efﬁciencies. Citing
University Health and Rockford Memorial Hospital,120where the SeventhCircuit had held that section only “forbids mergers that are likely to hurt
consumers,”121the court held that the district court’s approach “was notlegally erroneous,” without further explanation.3. FTC v. Tenet Health Care Corp.122In the most favorable court of appeals decision on efﬁciencies to date,the Eighth Circuit reversed a preliminary injunction blocking the merger
of the only two general- care hospitals in Poplar Bluff, Missouri. The
court found two errors in the district court’s decision, both relevant to
its view of the claimed efﬁciencies. First, the court held that the FTC
had produced “insufﬁcient evidence” to prove that Poplar Bluff was a
separate geographic market and not part of a broader Southeastern
Missouri market.123Second, the court held that the district court hadcommitted legal error in refusing to consider “evidence of enhanced
efﬁciency in the context of the competitive effects of the merger.”124The court described that evidence as showing that combining the two
hospitals would create a larger and more efﬁcient hospital capable of
delivering better medical care and that this would “enhance competition”
in the broader Southeastern Missouri area. The court noted that even
if third party payors “reaped the beneﬁt of a price war in a small corner
of the health care market in southeastern Missouri,” the loss of that
beneﬁt needed to be balanced against the improved quality of health
care received by their subscribers.1254. FTC v. H.J. Heinz Co.126In the most recent court of appeals decision addressing efﬁciencies,the D.C. Circuit noted that “the trend among lower courts is to recognize
the defense.”127The court held, however, that the parties had failed toproduce sufﬁcient evidence to rebut the inference of anticompetitive
effect and that the district court’s ﬁnding to the contrary in denying a
preliminary injunction was clearly erroneous. Citing the 1997 Guidelines’120U.S. v. Rockford Mem. Hosp., 898 F.2d 1278 (7th Cir. 1990).121Id. at 1282.122186 F.3d 1045 (8th Cir. 1999).123Id. at 1053.124Id. at 1054.125Id.126246 F.3d 708 (D.C. Cir. 2001).127Id. at 720.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal234statement that efﬁciencies would never justify a merger to monopoly or
near-monopoly, the court found that the very high concentration levels
required, on rebuttal, “proof of extraordinary efﬁciencies.”128The courtalso relied on the 1997 Merger Guidelines for its conclusion that asserted
efﬁciencies must be “merger speciﬁc” to be cognizable.129The court heldthat the district court had committed error by failing to explain why the
parties could not achieve comparable efﬁciencies without a merger.130B. District Court DecisionsDistrict court decisions increasingly assume the availability of an efﬁ-ciencies defense, often citing the Merger Guidelines to support their
assumption. The defense has achieved mixed results in the courts: in
three cases the courts accepted the defense and in four the courts rejected
it.131In each case, however, the court used the basic analytical frameworkset out in the Merger Guidelines to evaluate the claimed efﬁciencies.1. U.S. v. Long Island Jewish Medical Center132In ﬁnding the merger of two hospitals on Long Island lawful over theDepartment’s objections, the court adopted the Guidelines’ approach
and held that to rebut a prima facie case of illegality the efﬁciencies
claimed must be “signiﬁcant” and must be shown “ultimately to beneﬁt
consumers.”133The court held that to meet this standard the partiesmust prove that the merger is likely to “enhance rather than hinder
competition because of increased efﬁciency.”134The court found thatthe efﬁciencies that were claimed, which were on the order of $25–30
million per year, met both standards, in part, because the hospitals were
nonproﬁt and would therefore be likely to pass any cost savings on to
the community, which they had also committed to doing in an agreement
with the New York State Attorney General.128Id. at 720. In Heinz, the merging parties were two of only three producers of babyfood in a market in which entry was found to be unlikely, and were the only two rivals
for placement as the second baby food brand on supermarket shelves.129Id. at 721.130One of the authors of this article has criticized the court of appeals decision forgiving too little deference to the district court’s ﬁndings of fact and for applying too high
a standard both with respect to the magnitude of the efﬁciencies and to the likelihood
that they could be realized by alternative, less anticompetitive means. See Kolasky, supra
note 98, at 82. For a different perspective on the case, see Thomas B. Leary, An Inside Look
at the Heinz Case, Antitrust, Spring 2002, at 32; David Balto, The Efﬁciency Defense in
Merger Review: Progress or Stagnation, Antitrust, Fall 2001, at 74.131This excludes the cases decided on appeal discussed in the previous section.132983 F. Supp. 121 (E.D.N.Y. 1997).133Id. at 137.134Id.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE2003]Merger Guidelines and Efﬁciencies2352. U.S. v. Country Lakes Foods, Inc.135This case, a DOJ challenge to a merger of two dairies, is the onlylitigated non-hospital case in which an efﬁciencies defense has prevailed.
In ﬁnding the merger lawful, the court found that the efﬁciencies that
would result from an increased volume of production due to the merger
would enable the merged ﬁrm “to compete directly with the market
leader” and thereby “enhance competition.”136As in Tenet, this conclu-sion depended importantly on the court’s related conclusion that the
government had failed to prove that the geographic market was as narrow
as it had alleged.3. Staples,137Cardinal Health,138and Swedish Match139This trilogy of FTC preliminary injunction cases in the District Courtfor the District of Columbia all closely followed the analytical framework
of the Merger Guidelines in ﬁnding that the efﬁciencies claimed did
not rebut the FTC’s prima facie case. In Staples, the court expressly
rejected an effort by the FTC to impose on parties a higher standard of
proof in litigation than the Guidelines impose for agency review of
mergers. The court refused to apply the “clear and convincing evidence”
standard the FTC advocated, observing that imposing such a heightened
standard “would saddle section 7 defendants with the nearly impossible
task of rebutting a possibility with a certainty.”140In each case, the courtnevertheless found that the claimed efﬁciencies were badly overstated,
that they had not been shown to be merger speciﬁc, and that the parties
had also exaggerated the extent to which they would be passed on
to consumers.This review of the case law shows that the Merger Guidelines havebeen inﬂuential in shaping the courts’ approach to efﬁciencies, just as
they have been in other areas. The courts have followed the agencies’
lead in accepting that efﬁciencies may be used, in appropriate circum-
stances, to rebut a prima facie case of illegality based on presumptions
drawn from market shares and concentration ratios. The courts have
also adopted the same basic analytical framework as the Guidelines,
sometimes citing the Guidelines, but also often relying on the Areeda-
Turner treatise, on which the current Guidelines approach is largely
modeled.135754 F. Supp. 669 (D. Minn. 1990).136Id. at 680.137FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997).138FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998).139FTC v. Swedish Match, 131 F. Supp. 2d 151 (D.D.C. 2000).140970 F. Supp. at 1089.World Composition ServicesSterling, VA(571) 434-2510ABA: Antitrust LJ Vol. 71, No. 1, 2003ab4268ukol08-22-03 10:26:38✄-----------------------------------------------------------------------------------------------------------------------------CUT HERE[Vol. 71Antitrust Law Journal236XI. INFLUENCE ON OTHER JURISDICTIONSIn his 1992 article, Robert Pitofsky argued that “[i]n resisting incorpo-ration of an efﬁciencies defense into merger enforcement, the United
States is remarkably out of step with the law of other industrialized
countries.”141The foregoing history of the treatment of efﬁcienciesreveals that this statement badly mischaracterized the state of agency
policy and practice, even as of 1992. It also ignores the important role
the Merger Guidelines—and the intellectual debate about the ideas in
the Guidelines—have played in shaping competition policy outside the
United States. Numerous jurisdictions outside the United States have
followed the U.S. Merger Guidelines and recognized an efﬁciencies
defense. Some countries have adopted approaches that are very close to
that set forth in the Guidelines. Included in this group are Argentina,142Australia,143Brazil,144Israel,145New Zealand,146South Africa,147and Vene-141Pitofsky, supra note 84, at 213.142Argentina’s Guidelines for the Control of Economic Concentrations provide that anotherwise prohibited merger may be approved if the efﬁciencies are great enough that
the net impact on the general economic interest is beneﬁcial. Only merger-speciﬁc efﬁ-
ciencies may be considered. Resolution No. 726 of the Secretariat of Industry, Commerce
and Mining, issued Aug. 25, 1999. See Javier Petrantonino & Marcelo den Toom,

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