Corporate & Securities Law

Rosch on Competitive Effects v. Structural Arguments

By Manfred Gabriel

In a speech held earlier this month, FTC Commissioner Tom Rosch discussed the litigation of merger challenges. His argument is that the focus on market definition or structural presumptions is neither required by the law nor a threshold issue in merger cases. The focus should instead be on whether a transaction is likely to lessen competition substantially, which may or may not turn on market definition.

This is not a new point, and especially in unilateral-effects cases it seems pretty well accepted that direct proof of competitive effects is both more convincing and more reliable. That does not mean that courts have been willing to side-step market definition, and the FTC certainly has approached the actions it has brought with market definition at the center or its arguments. Rosch cites to Arch Coal and to Oracle as examples.

It seems to me that in investigations of mergers or acquisitions the FTC seems more willing to go to competitive effects directly, and that an elaborate market definition is sometimes supplied for litigation. The example is Whole Foods, where the FTC lost on market definition (the appeal is currently pending). (In that case, of course, the FTC did not really offer a product market definition because it focused on “premium natural and organic supermarkets” and not on “products sold in premium and organic supermarkets,” which left the argument on a weak footing to my mind.)

Rosch suggests that it is time to revise the merger guidelines to make explicit that market definition should not (always) be the first step in the analysis. He writes:

All of this is not to say that the agencies can eschew market definition altogether. For example, as the Seventh Circuit held in a Sherman Act case, the plaintiff must at least identify the ?rough contours? of the relevant markets. That makes sense. It is implausible to argue (or conclude) that a merger is likely to have competitive effects without describing at least roughly those who are likely to be adversely affected by it. But I would contend that the proof of relevant markets can be defined by direct proof of likely competitive effects. I have described this as ?backing into? the market definition. Others have described the competitive effects evidence and the market definition evidence as ?two sides of the same coin.? Both mean the same thing to me: the relevant markets need not be defined in the order or in the fashion set forth the Merger Guidelines. [citations omitted]

In the second part of the speech, Rosch discusses the value of “telling a story,” and makes a number of proposals: leading off with the most senior knowledgeable representatives of the merging parties themselves, presenting the documents telling the story during their examination, being wary of customer and competitor testimony, and finally, dealing effectively with the media. In discussing these suggestions, Rosch discusses the dynamics of cross and direct examination of (adverse) witnesses, which brings the admonition about story-telling to life.

Interestingly, Rosch isn’t sure about the value of economic evidence at trial, especially the kind requiring formulas.

A note of caution about such analyses and experiments should be sounded. They must be ?well-controlled? so as to eliminate or at least minimize the possibility of other explanatory variables. As I say, an experienced and attractive economist who is a good teacher can be a significant contributor to the story line. However, if and to the extent that his or her direct testimony can be impeached on cross-examination by, for example, demonstrating that other explanatory variables were not ruled out or that they were ruled out when they should not have been, that kind of expert testimony can severely hurt, rather than contribute to, the story line.

The speech can be found here (pdf). Highly recommended.

Full post as published by Antitrust Review on June 26, 2008 (boomark / email).