The United States wants to improve its business competition. At the beginning of his mandate, President Biden denounced that, in the last 25 years, he has increased the strength of business monopolies. He attributed this to the lack of firmness of American courts in applying the laws that protect competition (and which they are required to enforce). This permissiveness would have contributed decisively to the high levels of business concentration in recent years.
The problem (the excessive concentration of economic power) and its solution (competition as an antidote) are clear. The pending task is how to measure competition in the markets taking into account the particularities that arise from the technological (digitalization) and commercial (globalization) changes of the 21st century.
Hence, the US Department of Justice (DJ) and the Federal Trade Commission (CFC) – which are in charge of enforcing federal antitrust laws and preventing corporate mergers and acquisitions that could reduce competition between companies – have consulted publishes the draft of a new guide for corporate mergers (MG-2023). The last update dates back to 2010.
With these new guidelines we seek:
- Provide greater legal security to companies.
- Guide the actions of the courts of justice in case of conflict.
Industrial organization and competition
The structure-behavior-results (ECR) paradigm SCP framework) examines the cause-and-effect relationship between industry structure, firm behavior, and market performance. The ECR incorporates three visions of competition:
- The one that focuses on the structure of the market (concentration).
- The one that does it in the behavior of companies (rivalry versus concertation).
- That which relates competition to results for society (contribution to consumer well-being).
Thus, competition increases with less concentration, more rivalry and prices closer to production costs.
However, according to the logic of the paradigm, the three views of competition are summarized in one by proposing a unidirectional causal relationship from structure to results. This not only nullifies the value of the behavior but also recognizes the power of the structure to achieve the desired results.
Utilitarian criteria
In the 1970s there emerged new industrial economy (NEI) claiming, through game theory, the importance of behavior in business competition through two premises:
- Concentration in markets is determined by competition itself.
- Companies only care about short-term results (optimizing resources, producing and selling as much as possible at the lowest possible cost) and medium term (increasing the value/cost ratio that they achieve through innovation).
From then on, in trials for anti-competitive actions, arguments with an economic content gained prominence and judicial decisions leaned towards utilitarian criteria such as:
- The consumer surplus criterion: for a merger to be approved, it is enough to demonstrate that with it customers will be able to buy at lower prices than those expected without a merger.
- The total surplus criterion: a merger can be approved, even if prices rise, if producers increase profits enough to compensate for the loss of consumers.
The disqualification of the business structure as the origin of the conduct and the prevalence of utilitarian criteria in judicial rulings have contributed to the high concentration and loss of competition in the US markets diagnosed in Biden’s presidential order.
Business competition of the 21st century
The update of the MG-2023 merger guidelines seeks to recover and reinforce the basic principles of competition:
- Market concentration.
- The barriers to entry to new competitors.
- The preference for organic growth over mergers to gain market share.
Furthermore, it reaffirms the effective possibility of choosing clients, suppliers, workers, investors and citizens in general as the superior criterion for assessing market competition.
The question is to know how conflicts between the three dimensions of competition, structural, behavioral and consequential, will be resolved, in cases where they occur.
The opinions of economists, jurists, and consultants on the contents of the MG-2023 guidelines should contribute not only to improving the final wording of the text but also to gain precision about the meaning, scope and measurement of competition in the technological and commercial circumstances of the XXI century.