Higher Profits as a Merger Defense: Innovation, Appropriability, and the Horizontal Merger Guidelines
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Description
Parties to a horizontal merger may avoid antitrust liability by showing that the transaction will have a pro-competitive effect. The major focus of such an “efficiencies” defense is usually price—for example, that the merged entity will enjoy economies of scale, thereby lowering costs and putting downward pressure on price, ultimately to the benefit of consumers. A second, less frequent defense is to argue that the transaction is likely to increase innovation, again to the benefit of consumers. The revised Horizontal Merger Guidelines, issued by the U.S. Department of Justice and Federal Trade Commission (FTC) in 2010, expanded the treatment of innovation as a basis for an efficiencies defense. This comment examines an important but neglected aspect of the Guidelines’ discussion of innovation- based efficiencies. New language in the Guidelines suggests, as one way among several in which innovation matters, that a transaction might be approved if it permits a firm to “appropriate a greater fraction of the benefits resulting from its innovations.” In other words, higher profit is sometimes a merger defense. The Guidelines neither explain why increased appropriation should support clearance of a merger nor identify the limits of such a principle. This comment is an effort to fill that gap. The analysis proceeds in three parts. First, I introduce the “increased appropriation defense” as a type of innovation-based efficiencies defense contemplated in the revised Guidelines. Second, I present a transaction to which the increased appropriation defense was not applied, a transaction challenged by the FTC in federal court. In this deal, a drug maker bought the rights to NeoProfen, a new drug that treated a disease for which the drug maker already owned the only alternative drug therapy. My account emphasizes non-price competition between the two drugs, in contrast to the court’s focus on price competition. I conclude that substantial price and non-price competition existed between the two drugs, making the availability of an efficiencies defense relevant to the outcome of the case. Third, I consider how an increased appropriation defense might have applied to the NeoProfen acquisition. At its most expansive, the increased appropriation defense might support any acquisition that allows an innovator to increase the profits from its innovation. This interpretation is doubtful, I argue, in light of other provisions of the Guidelines. At a minimum, the increased appropriation defense permits a combination of complementary assets, the bringing together of which makes possible or enhances the marketing or distribution of an innovation. A difficult intermediate case arises when a merging party is poised to make socially beneficial expenditures—for example, investment in the development of an improved version of a product—that are profitable only if its ability to appropriate the benefits is preserved through merger.
Source Publication
European Competition Law Annual 2010: Merger Control in European and Global Perspective
Source Editors/Authors
Philip Lowe, Mel Marquis
Publication Date
2013
Recommended Citation
Hemphill, C. Scott, "Higher Profits as a Merger Defense: Innovation, Appropriability, and the Horizontal Merger Guidelines" (2013). Faculty Chapters. 768.
https://gretchen.law.nyu.edu/fac-chapt/768
