MERGER EFFICIENCIES: RECONSIDERING THE "PASSING-ON" REQUIREMENT

Abstract

Both the courts and the antitrust enforcement agencies often assert that merger-related efficiencies should not be recognized formally as an offset to likely anticompetitive effects unless the proponents demonstrate that the efficiencies (1) are merger specific, i.e., equivalent or comparable savings achieved by the merging firms cannot reasonably be achieved by some less anticompetitive alternative, and (2) are likely to be passed to consumers in the form of lower prices.1 The logic of the merger-specificity requirement is well accepted: if efficiencies may be achieved by some means that does not create market power, they cannot serve as a justification for the creation of market power. The passing-on requirement, on the other hand, is more controversial. At a minimum it represents a clear invocation of the consumer surplus standard (prohibiting wealth transfers), rather than the total surplus standard (maximizing allocative efficiency), for evaluating the legality of transactions under Section 7 of the Clayton Act.2 More important, even assuming that prohibiting a reduction in consumer surplus is the only objective of Section 7 analysis, the passing-on requirement, in its conventional articulation, appears to be based on a conception of market conduct that is entirely at odds with the basic economic theory upon which modern antitrust law is based. Indeed, application of the requirement, as motivated by this misconception of market conduct, would discount efficiencies in those cases in which efficiencies ought to have the most relevance to Section 7 analysis.