FTC:WATCH NO. 530
THE aai COLUMN
The Future and Antitrust
by Albert A. Foer
Every day seems to bring a new "world's largest merger" story. Exxon's acquisition of Mobil was the big one, at $80 billion, but MCI Worldcom's just-announced acquisition of Sprint is valued at $108 billion, beating the old record by an enormous 35%. Interestingly, these two mergers highlight a contradiction inherent in Big Business' attitude toward antitrust's appropriate time frame.
In the Exxon/Mobil case, advocates of the merger want the government to focus on short term effects on competition, ignoring the longer term. In the MCI/Sprint, they want government to ignore the short term and focus on the long term. Which approach is right: focus on short-term, focus on long-term, or focus on both?
Federal merger policy in the past thirty years has concentrated on one microeconomic question: will this particular merger result in overlaps that are so direct, in markets that are so concentrated, that the effect may be to permit the merged company (unilaterally or in cahoots with other oligopolists) to raise prices for a sustained period? Corporate counsel are so in-tune with this music that they now not only announce that their clients will merge, but also announce in advance that they already anticipate agreeing to various asset divestitures as a condition of government approval. Indeed, they typically sing, as well, about future efficiencies that will undoubtedly be passed on to consumers. The government, for its part, dutifully identifies the overlaps, strikes a deal, and allows the merger to be consummated.
This is what everyone expects will happen in the Exxon/Mobil merger. Petroleum is not currently highly concentrated at most stages in most markets, but there is a clear trend toward concentration. Reports suggest that the FTC has aggressively sought documents and is apparently giving the merging parties something of a hard time, but speculation is that there will eventually be a consent order specifying which gas stations and which refineries have to go. This will probably avoid near-term price increases in various relevant antitrust markets. Some critics of this approach, including the AAI, argue that the FTC has a larger mission: it must look further down the road and determine whether a line will have to be drawn against further concentration, and if so, whether this is the time and place for line-drawing. Among the possible long-term effects that must be weighed: are our interests better served vis a vis OPEC (which, relevantly, has apparently regained its effectiveness since the merger was announced last year at a time of low prices) if we have a smaller number of oil companies or a larger number? Will approval of Exxon/Mobil likely encourage additional oil mergers and will it be a precedent that makes it more difficult to stop subsequent "catch-up" mergers in the same industry?
Now comes MCI Worldcom Inc., the nation's second-largest long-distance telephone company, eager to swap stock with Sprint, the third-largest long-distance telephone company. Together, they would have 26% of the long-distance market (1997 FCC data). AT&T, with 44.5%, would still be larger, but the top two companies would control over 70% of the market. This merger is well above the Merger Guideline thresholds. Not long ago, there were four big long-distance companies; now there will be two. Antitrust worked hard to break up the AT&T monopoly and consumers are only just beginning to recognize the promised benefit of lower prices. In a static world, this would be a no-brainer for antitrust enforcers: stop the deal.
But advocates of the merger say that the government should not base its antitrust analysis on today's concentrated market. The test is what will happen tomorrow (or the next day, perhaps). New competition is coming from all directions. In particular, the Baby Bells (once seven, now four), unleashed by the Telecommunications Act of 1996, will soon be into long-distance. With technology in tumult, telecommunication is changing dramatically, bringing new players and markets that must be defined more broadly to incorporate converging information-movement systems. Antitrust enforcers, we are told, should understand that the long-distance industry is dynamic and they must take into account the strategic plans of its dynamic membership, current and future.
By golly, they are right! That was the lesson of the General Dynamics case, where future ability to compete was evaluated. And it is the requirement of Section 7 itself, where the key phrases, "may lessen competition" and "tend to create a monopoly," use verbs that require forecasts of the future. Neither the statute nor the cases give guidance on how far into the future enforcers should look nor do they specify how to balance the short-term against the long-term in situations where the likely effects may vary over time.
We are not suggesting whether either the Exxon/Mobil or MCI/Sprint merger should be enjoined. Nor are we suggesting whether Microsoft should be held to be a monopoly, when it relies (like MCI/Sprint) on its proclaimed fears of future competition -- in that case emanating from still-tiny Linux and not-yet-an-operating system Palm Pilot. The implication, rather, is that prediction is an essential part of antitrust analysis. The power of prediction must be prudently exercised, not exorcised. We are fooling ourselves if we think we can run a competitive economy based solely on microeconomic analysis of existing markets. The challenge presented by the apparent rapid concentration of both petroleum and long-distance telephony is for the antitrust community to develop the tools for more reliable predictions about an industry's future -- and to have the courage to act on the basis of forward vision.
Corporate lawyers seem to say that a merger should be accepted if it has no anticompetitive effect in the short term or if it has no anticompetitive effect in the long term. But the proper standard should be the opposite: no approval if there is likely to be a negative effect in either the short- or the long-term. It should be the government's responsibility to make both analyses and explain clearly its reasoning.