The Exxon-Mobil merger -- April 12, New Republic article by Albert Foer

Apr 12 1999
Commentaries

THE NEW REPUBLIC
PLAYING MONOPOLY

By Albert A. Foer

Although the Microsoft and Intel cases have been getting most of the headlines lately, there's another antitrust matter now before the government that is of potentially greater relevance to consumers: the proposed merger between Exxon and Mobil. Eighty-eight years after the government broke up the Standard Oil monopoly, in one of the first great trust-busting crusades of early twentieth century, these two behemoths are planning the largest marriage in corporate history -- a deal worth $80billion. It will go through unless the Federal Trade Commission objects, and there's good reason to believe it won't.

Last year, the FTC approved another large oil industry merger -- British Petroleum's $53 billion acquisition of Amoco. It was merely the latest in a flurry of other petroleum combinations that have gone unchallenged in the past several years. In the B.P. deal, under the terms of an agreement with the FTC, the companies said they would divest 134 gas stations in eight cities in which the companies' ownership overlaps, as well as nine light petroleum products terminals. In addition, in 30 cities, the companies would have to make it easier for as many as 1,600 independent retail dealers to switch to other brands. Most experts expect the FTC to strike a similar deal with Exxon and Mobil: in exchange for their selling off some of their assets in certain concentrated markets-- probably less than 15 percent of their overall holdings -- the companies will be allowed to merge.

Such a bargain would avoid protracted litigation between the government and the oil companies, while allegedly preventing -- through the agreed-upon divestiture-- too much industry concentration in any particular city or region. Anyway, with gasoline so cheap these days, consumers don't seem particularly exercised about the possibility of concentrating more power over gas-pump prices in an ever smaller group of companies.

But the lack of public concern doesn't fully explain why this merger is likely to go through. Indeed, the willingness to approve the Exxon-Mobil merger is emblematic of the government's attitude toward mergers more generally. While sometimes willing to attack monopolies and oligopolies whose concentration levels are very high, the government has treaded too lightly in the presence of trends that are well on their way but have not yet reached the perceived danger zone.

It was not always that way. Back in 1914, Congress passed the Clayton Act, empowering government to attack a merger before a monopoly or oligopoly existed. As amended in 1950, the act prohibits mergers where the effect "may be substantially to lessen competition, or tend to create a monopoly.

The Clayton law is known as an "incipiency statute" because it deals with the possible future effects of mergers, and not only their immediate consequences. And, for a while, the courts encouraged the government to interpret it broadly. In the 1966 case of U.S. v. Von's Grocery Co., for example, the Supreme Court held that a merger of the third- and sixth- largest grocery chains in Los Angeles, representing a combined market share of a mere 7.5 percent, considered in the context of an industry-wide merger trend, violated the Clayton Act.

Von's Grocery probably went too far. While the number of grocery stores in the Los Angeles market had declined from more than 5,300 to about 3,800, it was still highly competitive. If Von's Grocery had remained the rule, all of our industries would be highly fragmented, and consumers would have lost out on many cost-cutting efficiencies. In addition, small firms would not have been able to sell out to larger ones, thus reducing incentives for entrepreneurship and weakening American competitiveness abroad.

But, if Von's Grocery went too far, so did the counter-reaction. In the 1980s, the Reagan administration brought to antitrust enforcement an extremely narrow, efficiency-based concept of antitrust law. At the FTC and Justice Department, "Chicago school" free-market economists believed that the government should let the market work out temporary defects on its own, because market forces almost inevitably push the economy toward efficiency. Except in clear cases of collusion, the administration did almost nothing.

Not surprisingly, mergers have become much more common. Today, we are in the midst of what appears to be the greatest merger wave in our history. Major industries--not only petroleum, but banking, electricity, automobiles, airlines, telecommunications, bookselling, and more--are undergoing mind-bendingly rapid structural change. The latest example was the merger of BankBoston-- itself the product of a merger between BayBanks and Bank of Boston-- and Fleet Financial Group in March. The new bank will be the nation's eighth largest.

Although President Bush launched a modest revival of antitrust enforcement -and although President Clinton has done even more-the current effort is tempered both by an obvious lack of resources and by the constraints of an antitrust system that is still too much in the intellectual debt of Chicago.

And so the Exxon-Mobil merger brings us to an antitrust crossroad. It is true that neither Exxon nor Mobil has particularly large market shares on a national level, and there's little doubt that the FTC will take action in specific cities where the combined share will be more than 20-30 percent. But this may not be enough.

Indeed, the key now is for the FTC to think more broadly as it conducts its analysis of the merger. First, the FTC should consider whether is it reasonably likely that other petroleum companies will follow suit if B.P. and Exxon eliminate Amoco and Mobil from the market. The answer is probably "yes." After all, if these companies -- already quite large-- feel they must be much larger in order to compete in a world of low oil prices, smaller companies will likely feel compelled to merge just to keep pace with the industry leaders. While it's appropriate for the FTC to use concentration statistics as a means for measuring the danger, the FTC should also try to gauge the impact of joint ventures-which are very prevalent in the petroleum industry-on competition.

The FTC needs to decide at what point mergers would so hinder competition that a single firm or group of firms would have the power to raise prices beyond the competitive level. From the standpoint of policy, it might make more sense to draw a line now, when the largest firms in the industry are merging, rather than waiting until next year or the year after when smaller firms rush to merge - at which point an industry imbalance would be effectively institutionalized. Surely, we would prefer an industry with firms that are roughly comparable in size to one in which a couple of firms stand out as dramatically larger than the rest.

Such attention might seem rather drastic now, with gasoline cheap. Yet petroleum is historically a cyclical industry. If we encourage the departure of profitable firms today, it is unlikely that new firms will enter the market when prices go up. When and if OPEC regains its previous market power, it's possible the U.S. consumer would be better served by having eight major oil companies dealing with OPEC, rather than, say, three or four. It's easier for a cartel to monitor its internal price controls if it has to deal with a small number of buyers.

Yes, some economists would scoff at notions like these. They would say that government efforts to manage the future will give rise to efficiency-harming bureaucratic intervention. If the government can stop a combination based on its predictions and desires about how an industry should be structured, they'll ask, isn't the next step national industrial policy?

But this argument is misleading-and not merely because in the end the courts will have the opportunity to decide whether the FTC has presented a compelling case. Ultimately, it is impossible not to make a decision on the Exxon-Mobil merger without basing it on some sort of prediction, for even a decision to approve the merger is tantamount to a prediction that what the companies will accomplish is in consumers' best interests. And it's not as if merging companies' projections for their new efficiencies have a strong track record. In 1996, when the Union Pacific and Southern Pacific Railroads wanted to merge, they projected huge efficiency gains. Within a year after the merger, however, the new railroad was plagued with logistical problems.

Predictions about industry will always be imperfect, of course, but that doesn't mean the government has no right to make them. If you believe that government has an obligation to police anticompetitive behavior, then the government must consider the future impact of mergers as well as the immediate effects. And, in the case of the Exxon-Mobil merger, a failure to act now might require more drastic action later on-after consumers have already paid the price, quite literally, and after an important opportunity for reinvigorating antitrust law has passed.

Albert A. Foer is President of the American Antitrust Institute, an independent, non-profit organization based in Washington, DC.