FTC:WATCH No. 599
Washington, D.C. November 18, 2002
the aai column
The FTC's cruise lines decisions: three cheers for transparency
By Warren S. Grimes, Norman Hawker, John Kwoka, Robert H. Lande, and Diana Moss
By a vote of 3-2, the FTC recently closed its investigation of two proposed acquisitions involving the three largest firms in the ocean cruise industry. The largest firm (Carnival Corp.) and the second largest firm (Royal Caribbean Cruises) had been battling to acquire the industry's third largest firm (P&O Princess Cruises). The agency's investigation of these dueling merger proposals gave rise to intense advocacy by the merging parties and to an active role by the American Antitrust Institute (AAI) which, based upon the available information, urged the Commission not to approve either transaction as proposed.
What lessons can be learned from the cruise merger experience? Although the AAI's position did not prevail, one important aspect of the Commission's decision was most gratifying and, hopefully, will be a harbinger of future Commission practice.
The FTC took the unusual but highly constructive step of issuing a Statement explaining its reasons for closing the investigations. The Commission's statement, together with the statement of the two dissenting Commissioners, allows for more informed counseling concerning merger enforcement policy and more meaningful public oversight of that policy.
When a federal agency challenges a merger, its reasoning is clear from the complaint and other legal material that the agency files. If the agency does not challenge an acquisition, however, there is usually no public explanation. This stands in contrast to other competition law systems, such as those of the European Union and the United Kingdom, where an administrative decision not to challenge key proposed acquisitions is accompanied by a statement of explanation. Similarly, other U.S. federal agencies, such as FERC, are required to explain their decisions not to challenge mergers.
Obviously, the great bulk of merger transactions raise no genuine antitrust issues. But when an agency devotes substantial resources to investigating a proposed acquisition, it should explain its decision, regardless of the final disposition. As Competition Bureau Director Joseph Simons noted in a very insightful speech on this merger: "[I]t seems obvious that explaining why the Commission decides not to take action in a particular case may well provide at least as much useful information as an explanation of why the Commission decides to take action in other cases."
The AAI, as a public advocacy group, has sought to promote effective federal merger enforcement, in part through selective involvement in merger investigations. Although lacking the resources to get involved in a large number of active merger (or other antitrust) investigations, the AAI has taken positions on a number of pending acquisitions or joint ventures, and has always sought to communicate its concerns to the relevant agency. For any organization other than the merging parties, of course, involvement in a pending merger investigation requires operating with incomplete information. Non-party organizations lack access to the confidential material provided to the agency conducting the investigation. A public interest organization's involvement can even create tensions with agency staff, who understandably do not appreciate being second guessed by outsiders lacking full information. So why does the AAI bother to get involved in merger investigations?
A major AAI goal has been to increase accountability for merger enforcement decisions, since merger enforcement is, of course, one of the most important tasks assigned to the antitrust agencies. Oversight and accountability of this vital function are necessary for sound government and development of consistent public policy. Regrettably, the current system typically provides insufficient transparency for oversight to function smoothly and effectively.
The Commission's Statement regarding the proposed cruise mergers (signed by 3 Commissioners) and the separate Dissenting Statement (signed by 2 Commissioners) are a welcome demonstration that the Commission's reasoning can be made public in a constructive manner. To be sure, this is not the first time that the FTC has issued such a statement; there were, for example, Commission Statements when the agency decided not to pursue the Boeing/McDonnell Douglas merger. But such Statements have been the exception.
Absent the commissioners' Statements, the antitrust community would have no basis for knowing the reasons behind their decision not to challenge the cruise line transactions. At least one of the acquiring firms, for example, argued that the relevant antitrust market included land-based vacations and that its transaction would generate significant efficiencies that would be passed to consumers. If the Commission had simply permitted the mergers to proceed without offering an explanation, we would not have known whether the Commission had accepted one or both of these arguments.
The easiest course of action would have been for the Commission to decline to challenge the transactions, without explanation. This would certainly have made the agency less vulnerable to criticism. But because they stated the reasons for their decision so clearly, the antitrust community can now react to the decision and counsel clients in a more informed manner.
We believe, for example, that the most controversial parts of the Statements were their different conclusions in evaluating the "yield management" argument. The FTC analyzed the issue in detail for both its anticompetitive and procompetitive potential. The Dissenting Commissioners believed that the reverse auctions that were a feature of yield management made it likely that an acquisition would lead to postmerger coordinated effects, increased price discrimination and an increase in average prices. The Commission's majority disagreed.
The cruise decision Statements transformed the yield management argument from an obscure curiosity to one that the antitrust community will have to take very seriously in the future. We expect that scholarly articles will be written on the subject of yield management, that it will be the topic of bar association programs and that it will arise in future merger cases (and possibly in other types of antitrust cases as well).
We are delighted that the FTC put this issue on the table and look forward to the discussions that surely will follow. It is an example of the benefits that come from transparency, and the Commission's action to promote this debate within the antitrust community deserves significant praise.
One may disagree with the FTC's decision on the merits of these transactions, but its process was transparent and exemplary. It should be commended and continued.