Antitrust Law
The only superstore in town
In January 1997 the Federal Trade Commission compared Staples’ prices city by city. Where Staples was the only office superstore in town, it charged about 13 percent more for the same goods than it did where it competed with both Office Depot and OfficeMax. The sample was not a handful of loss leaders. It covered office supplies accounting for 90 percent of Staples’ sales. Staples was then trying to buy Office Depot for $4 billion, and its defense was that office products are sold nearly everywhere: by Walmart, by warehouse clubs, by Best Buy. Its own pricing answered that. Staples and Office Depot checked each other’s prices constantly and other retailers’ prices rarely, and each called a town with no rival superstore a “non-competitive” zone.
Judge Thomas Hogan drew the market the Commission’s way: consumable office supplies sold through office superstores, a market with three sellers in it. He granted the preliminary injunction (FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (opens in a new tab)), and Staples abandoned the deal (opens in a new tab) the following month. The case turned on a boundary rather than on a rule, and most antitrust cases do. This reading follows the chain from the statutes to that boundary to the numbers it produces. It is the chain you walk in Part 1: name the market your merger sits in, work out what the deal does to concentration, and say where that leaves it under the Guidelines.
Three statutes and two standards
The Sherman Antitrust Act of 1890 has two working sections. Section 1 (opens in a new tab) reaches agreements: contracts, combinations, and conspiracies in restraint of trade. Section 2 reaches what a single firm does, and it asks for two things. A monopolization case needs monopoly power in the relevant market. It also needs the willful acquisition or maintenance of that power, as distinguished from growth that came from a superior product, business acumen, or historic accident. The two-part test comes from United States v. Grinnell Corp., 384 U.S. 563 (1966) (opens in a new tab). Being big is not the offense. Getting big the wrong way is, and proving it starts with a market.
The Clayton Act of 1914 works earlier in time. Section 7 (opens in a new tab) reaches an acquisition where “the effect of such acquisition may be substantially to lessen competition.” The operative word is “may.” Congress wrote the section to stop restraints in their infancy, before they harden into the completed violations the Sherman Act punishes (Brown Shoe Co. v. United States, 370 U.S. 294 (1962) (opens in a new tab)). A merger case is therefore a forecast, argued before the harm exists, which is why so much of it is fought over economics. The Federal Trade Commission Act supplies a third route, Section 5, which declares unlawful unfair methods of competition. The Commission usually pleads it alongside Section 7, as it did against Staples.
Once a practice reaches a court, the court has to decide how hard to look at it. A short list gets no look at all. These are the per se violations, conduct so damaging and so devoid of competitive justification that a court condemns it “without elaborate inquiry as to the precise harm” it caused. The business excuse offered for it does not matter either (Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958) (opens in a new tab)). Horizontal price fixing is the paradigm. So is an agreement among competitors to split up territories or customers, and so is bid rigging, where the bidders decide in advance who will win.
Everything else gets the rule of reason. The court defines the market, measures the defendant’s power inside it, and weighs the practice’s anticompetitive effects against its procompetitive justifications. That is a much heavier lift for a plaintiff, so the sorting matters enormously. And the per se list keeps getting shorter. For most of a century a manufacturer that set a minimum resale price for its dealers was automatically liable under a 1911 decision, Dr. Miles. The Supreme Court overruled it in 2007 and sent vertical price restraints to the rule of reason (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (opens in a new tab)). The boundaries of per se illegality should not be immovable, the Court said, because the Sherman Act has been read from the beginning as a common-law statute. Merger cases run on the rule of reason, structured by the Merger Guidelines.
Quick check: the statutes and the two standards
Four questions on what each antitrust statute reaches and how hard a court looks. Pick one answer each; the explanation appears after you choose.
Two competing bakeries agree to split the county between them: one takes the north half, the other takes the south. Neither raises a price. How does a court analyze the agreement?
A manufacturer tells its dealers it will stop supplying anyone who sells its product below a set minimum price. Under current law, how is that arrangement judged?
A company holds 85 percent of a market because its product is better than anyone else's, and it has never acted to exclude a rival. Has it violated Section 2 of the Sherman Act?
The Federal Trade Commission sues to stop a proposed merger. Which statute supplies the rule the court applies to the merger itself?
Drawing the boundary
A relevant market has two dimensions, and the product dimension is where the fighting happens. Its outer edge is set by “the reasonable interchangeability of use or the cross-elasticity of demand” between a product and its substitutes. If buyers would switch when the price rises a little, the substitute belongs in the market. Inside that outer edge, Brown Shoe held, a narrower submarket can be a market of its own for antitrust purposes.
The same case listed what to look for, and courts still call the list the practical indicia. Do the industry and the public treat the submarket as a separate thing? Then come the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Economists add the hypothetical monopolist test. Imagine a single firm controlling every product in the market you have proposed, and ask whether it could profitably worsen the terms it offers buyers. If it could not, buyers must be escaping to something you left out, and the market is drawn too narrow.
The geographic dimension asks the same question about place. Is a buyer choosing among sellers nationwide, or among the ones within a reasonable drive? In Staples the parties agreed on that half of the answer, that metropolitan areas were the right geographic markets, and spent the trial on the product line instead.
Here is why the fight is worth having. A firm’s share is a fraction, and the boundary sets the denominator. Enforcers argue for narrow markets and defendants for broad ones, and the same two companies can look dominant or trivial depending on which side wins. That is the lesson buried in the 13 percent: Staples’ own prices showed that a shopper facing a higher price at the only superstore in town did not, in practice, drive to Walmart.
Quick check: defining the market
Four questions on how a relevant market gets drawn and why it decides so much. Pick one answer each; the explanation appears after you choose.
Why do enforcers usually argue for a narrow product market while defendants argue for a broad one?
An economist applies the hypothetical monopolist test to a proposed market and concludes that a single firm controlling everything in it could not profitably raise prices. What does that indicate?
In Staples, the Commission showed that Staples charged about 13 percent more in towns where it was the only office superstore. What did that evidence establish?
Which of these is one of the practical indicia Brown Shoe offered for identifying a submarket?
From shares to a presumption
Once the market is drawn, the shares can be added up. Concentration is usually measured with the Herfindahl-Hirschman Index, which squares each competitor’s percentage share and adds the results. Ten equal firms give an HHI of 1,000. One firm with everything gives 10,000. The squaring is what makes the index useful, because it weights a large firm far more heavily than a small one.
The 2023 Merger Guidelines (opens in a new tab) set two thresholds. A market above 1,800 is highly concentrated, and an increase of more than 100 points is a significant increase. Meet both and the merger is presumed to substantially lessen competition. A second route reaches the same presumption: a merged firm with a share above 30 percent, plus that same 100-point increase. The increase is easy to compute by hand, because a merger of firms holding shares of 20 and 5 percent raises the index by twice their product, or 200 points.
The structural presumption is older than the index. It came out of a bank merger in 1963 (United States v. Philadelphia National Bank, 374 U.S. 321 (1963) (opens in a new tab)). A merger that produces a firm with an undue share of the relevant market, and that significantly raises concentration, is so likely to lessen competition that it must be enjoined. The parties escape only by showing otherwise. The merged bank would have held at least 30 percent of commercial banking in the four-county Philadelphia area, and the two largest banks together would have risen from about 44 percent to 59 percent. The Court declined to name the smallest share that would threaten undue concentration, but said it was clear that “30% presents that threat.”
What the presumption does is move work, not decide the case. The government first makes out a prima facie case by defining a market and showing what the deal does to concentration in it. The burden of production then shifts to the merging parties (United States v. Baker Hughes Inc., 908 F.2d 981 (D.C. Cir. 1990) (opens in a new tab)). They have to show that those numbers mispredict the deal’s probable effect, either by proving as much affirmatively or by discrediting the data underneath them. The more compelling the government’s showing, the more the defendants have to produce. The ultimate burden of persuasion never leaves the government.
Three rebuttals recur. Entry may be easy enough that a price rise would invite it. The acquired firm may be failing, so that its assets would leave the market anyway. Or the merger may create efficiencies that reach consumers. One more thing is worth knowing before you apply any of this to a real deal: the Guidelines bind no court. A judge follows them when they persuade, and says so.
Quick check: concentration and the presumption
Four questions on the index, the presumption it triggers, and who has to prove what. Pick one answer each; the explanation appears after you choose.
In a relevant market, one firm holds 30 percent and another holds 10 percent. By how much does a merger of the two raise the Herfindahl-Hirschman Index?
A merger would leave a post-merger index of 2,400 and raise it by 250 points. What follows under the 2023 Merger Guidelines?
The government defines a market and shows what the deal does to concentration in it, making out its prima facie case. What happens to the burdens?
Which of these is a recognized way for merging parties to rebut the structural presumption?
The filing that starts the clock
All of that happens in a courtroom, and most deals never see one. What they see is the Hart-Scott-Rodino process, which runs on a clock.
A deal above the annually adjusted thresholds cannot close until the parties file with both agencies and wait. The wait is 30 days (opens in a new tab), or 15 for a cash tender offer or a bankruptcy sale, and the FTC and the Department of Justice settle between themselves which one reviews the deal. The reviewing agency then has three moves. It can end the waiting period early, let it run out, or issue a second request.
A second request is a demand for documents and data from both parties, and it stops the clock. Nothing closes until each side has substantially complied and a further period has run, usually 30 more days. Because the parties control how fast they comply, a second request can add months to a deal that has a closing date written into it. At the end the agency can close the investigation, negotiate a consent agreement that fixes the problem, or sue to stop the deal. Some parties read the signal and walk away first, as Staples did.
Which brings you back to where this started. In Part 1 you pick a real deal and run it down the same chain. What market is it in, what does it do to the numbers there, and where does that leave it under the Guidelines? Begin with the Antitrust Foundation Builder on the activity page, and make it tell you where in the Guidelines each point lives so you can read those pages yourself. Treat any share or concentration figure an AI hands you as a guess until a filing, an agency page, or a news account confirms it.
The numbers follow the boundary. That is why the boundary is what the fight is about.