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Mergers and Acquisitions: Primer on Economic Considerations in the FTC and DOJ Horizontal Merger Approval Process

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Publication Date: February 2007

Publisher(s): Library of Congress. Congressional Research Service

Series: RS22606

Topic: Business (Acquisitions and mergers)

Abstract:

The Federal Trade Commission (FTC) and Department of Justice (DOJ) jointly enforce antitrust laws that cover mergers and acquisitions of large companies. Initially, firms seeking a merger notify the agencies of their intent and provide information on their products and industries. Consumers, competitors, and other interested parties may also notify the enforcement agencies of their concerns. If the enforcement agencies determine a full review is warranted, they acquire more detailed information from the merging firms.

Regulatory agencies focus on several economic criteria to evaluate a proposed merger. First, they define the market according to likely substitution patterns by consumers and calculate the industry concentration. A merger is less likely to be approved if it would result in significant and non-transitory price changes (i.e. market power). Even if the merger would result in market power, the merger may be approved if the market is contestable, that is, if new firms could and likely would enter and compete. Cognizable efficiency, meaning an efficiency that is neither vague nor speculative, is another factor that could allow firms to merge even if market power results. If a firm or division would likely fail anyway, the agencies may permit the merger. In summation, the antitrust enforcement agencies balance likely anticompetitive costs of the proposed merger against likely efficiency gains.

This report will be updated as conditions warrant.