Antitrust Enforcers Draft New Guidelines for Approving Mergers. Here’s What It Means for the Food Industry.
U.S. antitrust laws ban business mergers that threaten to monopolize industries or give too few firms the power to stifle competition. Yet in recent years, antitrust enforcers at the Federal Trade Commission (FTC) and Justice Department (DOJ) have waived through mega-deals between some of the largest food and agricultural companies: Bayer-Monsanto in 2018, Amazon-Whole Foods in 2017, Kraft-Heinz in 2015, JBS and Cargill’s pork division in 2015, and more.
These deals followed a much longer trend of unchecked mergers in the food industry. Monsanto bought over 60 seed and genomics companies in under 40 years. Nearly 3,500 grocery stores were acquired between 1996 and 2000. And acquisitions played a major role in the dramatic consolidation of beef and pork packing.
This era of merger mania has its roots in the 1980s when antitrust practitioners decided that if a deal didn’t increase prices or otherwise harm consumers, then it generally didn’t violate the antitrust laws. Today, new antitrust officials are challenging this interpretation.
Last month, the FTC and DOJ released draft guidelines that explain the agencies’ new approach to reviewing mergers. The new guidelines rely more on legal precedent and less on economic theories to take a stronger stance against concentrated market structures, vertical integration, and harms beyond just higher prices, such as squashing nascent competitors or squeezing suppliers. Critics argue that the proposal turns back the clock while others say it brings enforcement back in line with the original intent of our country’s foundational antitrust laws. Either way, if enacted (and, critically, respected by the courts) these guidelines could prevent more takeovers in the food industry.
The new guidelines set stricter limits against mergers in highly concentrated markets. The draft cites a still-controlling Supreme Court ruling that said any deal that gives one company too large a share of a market “is so inherently likely to lessen competition substantially that it must be enjoined.” Thus the DOJ and FTC believe that any deal that would increase the market share of a company that already controls 30% or more of the market violates the antitrust laws. The guidelines also set greater limits on companies with 30% of one market from extending their dominant position by buying up businesses in new or related industries (such as Amazon’s acquisition of Whole Foods).
More straightforward limits will make litigating antitrust cases easier. Current guidelines require extensive economic analysis and projections to show that a deal will or will not increase prices. But in practice, this benefits the party that can hire the most convincing economic consultant to model the outcome they want. This evidentiary system favors corporate defendants even when their economic predictions prove wrong in the long run.
The need for so much economic analysis comes from the prevailing assumption that most mergers make companies more efficient and help lower prices (despite evidence to the contrary). This theory, propagated by economists from the University of Chicago in the 1970s, became orthodoxy under the Reagan administration and led antitrust enforcers to adopt a particularly permissive stance towards “vertical mergers” or mergers between corporations from different sectors (i.e. when a grain trader buys a chicken processor). In the 1980s, antitrust enforcers argued that vertical deals didn’t need as much scrutiny because they almost always helped firms lower prices even if they became dominant. Disastrous deals like the Live Nation-Ticketmaster merger and comprehensive post-merger analysis suggest otherwise.
The new guidelines take vertical deals more seriously and say that a merger cannot create a business that controls products or services that its rivals need to compete, because it could cut them off, charge them more, or otherwise put them at a disadvantage (called “foreclosure” risks). If a deal would give one company at or near a 50% share over these related markets that its competitors depend on, FTC and DOJ argue that that’s sufficient evidence of an antitrust violation. This could help block more vertical deals which are common in the food industry. In just the past three years, top meatpacker JBS bought a salmon company, Walmart invested heavily in a beef plant, Cargill acquired America’s third-largest chicken business, and Bayer bought a grain marketing software company.
Economist Carl Shapiro and former FTC commissioner Josh Wright argue that the agencies do not have economic evidence to back up this bright line. But a leading legal expert on vertical mergers, Steve Salop, argued that this presumption is “justified.” However, Salop and his co-author Jennifer Sturiale think that the guidelines could be more specific about harmful foreclosure tactics.
Overall, the draft guidelines explain numerous justifications for blocking mergers beyond just higher prices for consumers. DOJ and FTC will investigate deals that raise barriers to entry for current and future competitors. They will block deals that give firms too much power to suppress prices paid to suppliers or workers. Deals between companies with a history of collusion will also face more scrutiny, which could affect meatpackers recently accused of price-fixing. Many of these considerations are technically buried in the current merger guidelines, but they placed a clear emphasis on customers, saying, “Agencies normally evaluate mergers based on their impact on customers.” In this new update, broader harms can justify blocking deals in their own right.
Many prominent lawyers and economists have critiqued the new guidelines for relying on old legal cases to justify FTC and DOJ’s interpretations of the law. Others claim that the agencies are abandoning economic analysis. But one former head of the DOJ antitrust division, Bill Baer, thinks these critiques aren’t fair. “The fact of the matter is the Supreme Court has heard very few antitrust merger cases for decades and there were more merger decisions in the 1950s and 60s,” he told Food & Power. “The guidelines also talk about economic analysis extensively; they’re not abandoning economic analysis they’re integrating economic thinking with antitrust jurisprudence, and I think that’s appropriate.” By comparison, the prevailing horizontal merger guidelines don’t cite a single court case. Further, the cases cited in the new draft guidelines have never been overruled by the Supreme Court.
After the DOJ and FTC finalize their guidelines, they will still need to convince the courts to follow them. While judges have generally deferred to antitrust agencies’ expertise in interpreting merger law they aren’t required to. Enforcers also cannot point to the guidelines in court until they are final, which means this draft doesn’t have much legal force in ongoing merger reviews like Kroger’s $24.6 billion acquisition of Albertsons.
But in so much as the guidelines reflect how the DOJ and FTC interpret the law, we could expect to see their arguments in future merger challenges. In fact, we’ve already seen echoes of the guidelines in recent vertical merger cases and in the DOJ’s successful suit to block Penguin’s acquisition of Simon and Schuster, which didn’t make any claims about harms to consumers and focused entirely on harms to authors who would have fewer publishers to work with.
What We’re Reading
A recent New York Times column on grocery inflation suggests there’s not much to be done about rising food prices and argues corporate greed played at most a minor role, downplaying recent economic studies and statements that corporate concentration made food price hikes worse and more sustained. (New York Times/Axios)
An appellate court decided that Tyson Foods must comply with a subpoena from the New York Attorney General and provide documents for the state’s price gouging investigation. (Bloomberg Law)
Campbell Soup wants to acquire the parent company behind Rao’s pasta sauce for $2.7 billion. (Wall Street Journal)
Instacart cut its gig workers’ base pay from $7 to just $4 per order, driving more workers away from the platform. (Business Insider)