Was Bork Right About Mergers?
By David Henderson
In a just-published NBER study, “Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers,” NBER Working Paper 19939, economists Orley C. Ashenfelter of Princeton, Daniel Hosken of the Federal Trade Commission, and Matthew C. Weinberg of Drexel University write:
In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork’s views on merger policy from The Antitrust Paradox. Many of Bork’s recommendations have been implemented over time and have improved merger analysis. Bork’s proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.
Actually, though, they don’t show that, by an efficiency measure, Bork’s proposed policy was too permissive.
Let me explain.
Bork thought that allowing mergers even in allegedly oligopolistic markets would not harm consumer well-being. Ashenfelter et al, survey “49 distinct studies examining mergers taking place in 21 industries published over the last 30 years.” Here’s the paragraph that comes closest to summarizing their findings:
The empirical evidence that mergers can cause economically significant increases in price is overwhelming. Of the 49 studies surveyed, 36 find evidence of merger induced price increases. All of the airline merger studies find evidence of price increases, although the magnitude of the price increases appears to be more modest following recent mergers (2-6%) when compared to the mergers that took place in the 1980s. Similarly, most of the banking (6 of 7), hospital (5 of 7), and “other industry” (13 of 18) studies find evidence that mergers have resulted in price increases.
So, if the evidence is good, this is evidence against Bork’s view. (By the way, they do credit Bork for a more liberal policy toward mergers. The three authors, like Bork and like most economists in industrial organization who studied the government’s merger policy before economists, lawyers, and judges changed it in the 1980s, think that merger policy before the 1980s was way too restrictive, the 1960s Von’s Grocery case being one of the most egregious.)
Why, then, do I say that they do not show that merger policy was too permissive? Because Ashenfelter et al, like Bork, abjure Oliver Williamson’s insight in his classic 1968 article, “Economies as an Antitrust Defense.” Here’s what I wrote about that insight in my Wall Street Journal article, “A Nobel for Practical Economics,” after Williamson and the late Elinor Ostrom won the Nobel Prize in economics:
Although the Nobel committee did not highlight Mr. Williamson’s classic 1968 article, “Economies as an Antitrust Defense,” I will. Mr. Williamson showed that horizontal mergers of companies in the same industry–even those that increase market power and even those where the increase in market power leads to a higher price–can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.
Bork accepted Williamson’s insight, as, apparently, do Ashenfelter et al. So they don’t abjure it in the sense of repudiating it. But they do ignore it. So if we judge mergers using an efficiency standard, that is, a standard that takes account of increased producer surplus as well as reduced consumer surplus, we can’t say, even if the all the evidence they cite on price increases following mergers is solid, that Bork’s proposed merger policy was too permissive.
HT to Mark Thoma.