The aai Column for FTC:WATCH, April 24, 2006 Reprinted with Permission.
Transparency and Merger Review: What DOJ’s Whirlpool/Maytag Statement Doesn’t Tell Us
On March 29th, the Department of Justice (DOJ) closed its investigation into the proposed merger of Whirlpool and Maytag, allowing the controversial merger to go through without any conditions. In a somewhat unusual move, the DOJ issued a statement in connection with its decision not to challenge the proposed deal (see www.usdoj.gov/atr/public/press_releases/2006/215326.htm). Numerous parties have argued cogently for transparency in the antitrust enforcement process (see http://www.antitrustinstitute.org/node/10576 and Grimes in 51 Buff. L.R. 937, Fall 2003). While the antitrust agencies are under no obligation to explain why they close an investigation, the agencies have begun to offer statements in certain cases--perhaps in response to calls for transparency.
Statements might be issued in cases that generate significant opposition from rivals and/or customers of the merging companies, consumer interest groups, and competition watchdogs. They may also follow on the heels of decisions not to block deals that create market shares and concentration large enough that--in the words of Assistant Attorney General Thomas Barnett--they “create an initial rebuttable presumption that justifies an extensive look." The growing voluntary practice of issuing statements should be encouraged and the AAI applauds the DOJ for issuing a statement in the Whirlpool/Maytag matter. At the same time, it is also appropriate to ask whether agency statements enlighten or obfuscate. In this case, the AAI questions whether the DOJ statement sufficiently discloses both the factual and legal predicate for the agency’s action.
It is important to recall that this merger creates a combined Whirlpool/Maytag share of up to 75 percent, increases market concentration by as much as 2,000 HHI points, and produces post-merger markets with concentration as high as 6,000 HHI. The statement’s two-fold thrust is that this seemingly anticompetitive merger is made acceptable by the presence of (1) strong rivals with the ability to expand sales of laundry appliances and (2) merger-related efficiencies that would benefit consumers. While these kinds of reasons frequently explain decisions not to challenge a merger, the minimal information offered in the statement raises questions about whether the factual basis for these defenses is inadequate, or if the agency has not adequately disclosed the underlying facts.
Consider DOJ’s three rationales supporting the ability of rivals to expand sales to undercut a post-merger price increase for top-loading washers—a separate market identified in the AAI White Paper (see www.antitrustinstitute.org/recent2/477.cfm) as one in which the greatest harm to consumers is likely. One rationale is that U.S. manufacturers of top-loading washers have excess capacity; another is that foreign firms could divert top-loading output from plants in Asia and Mexico to the U.S.; and a third is that sales would be lost to front-loading machines. On this front, the DOJ’s reasoning creates more questions than it answers.
For example, the statement concludes that consumers would switch to more expensive front-loaders in response to a post-merger increase in top-loader prices. But it leaves us no better educated about why this would be the case in the presence of large disparities in prices (and thus different consumer segments) for top- and front-loaders. Prices for front-loading machines range from about $800 to $1,500, which Consumer Reports states is “. . .at least twice the price of most conventional top-loaders with agitators.” (see www.consumerreports.org/cro/appliances/washing-machines/washing-machines...). And while consumers can, in theory, recover higher front-loader capital costs through long-term efficiency savings, what should we do with evidence that they do not in fact make such life-cycle cost decisions?
The statement is also oddly silent on the hotly-contested issue of why the Sears Kenmore brand (manufactured by Whirlpool) is treated as a separate “rival,” as opposed to part of Whirlpool’s manufacturing share. The exposition leaves us no wiser as to what magnitude (or duration) of excess capacity the DOJ considers sufficient such that if U.S. firms were to expand output in the top-loading market, it would disable a price increase. Finally, the statement is uninformative on the details of the diversion of foreign-manufactured top-loading washers, particularly with growth in foreign demand, evidence of uneven foreign entry in the U.S., and the effect of brand-name loyalty on penetration rates. Exactly why does the DOJ predict that there will be foreign entry into a U.S. market that such companies have already shown a disinclination to enter?
The DOJ’s second reason for finding no fault with the Whirlpool/Maytag merger is that it will produce cost savings that will benefit consumers. An efficiencies defense—either as part of a prima facie case or an eleventh hour strategy—is based on information typically known only to the merging parties and antitrust enforcers. This makes outsiders who seek to evaluate the government’s decision-making even more reliant on transparency and thus requires more than the vague generalities offered by the DOJ. If efficiencies are to play a larger role in merger review--particularly with their spotty history of proving up the alleged gains--then we should know their source and their size. For example, shutting down high-cost Maytag plants may produce some savings, but if they are spread over Whirlpool’s vast, already low-cost production, would they amount to very much or even begin to offset the merged company’s substantial market power?
One of the benefits of transparency should be that it will enhance the public’s ability to predict government actions and thereby conform their actions. The DOJ statement in Whirlpool/Maytag fails to answer basic questions that would provide needed guidance and insight without compromising the confidential review process. Because decisions to close antitrust investigations are beyond the review of the courts, transparency is an essential part of accountability and the give-and-take that must guide a sound antitrust policy and its enforcement. ------------------------------------------------------------------------------------------------------------ *Dr. Moss is Vice President and Senior Research Fellow American Antitrust Institute, www.antitrustinstitute.org. Contact: email@example.com or 720-233-5971.