Suppose that some number (n) of firms with similar market shares compete in a well-defined market and two of them plan to merge. Suppose further that the two firms charge price equal to 10 and incur marginal cost equal to 5, and it is predicted that the post-merger price will equal 8 and marginal cost will equal 2 at the combined firm. Market power increases but price declines. Should the Federal Trade Commission or Department of Justice Antitrust Division (the Agencies) block or permit the merger?

Plainly, competition in the ordinary sense declines. This is obvious if n=2 (merger to monopoly). It is obvious if n>2 as well. For some large n (n>6?, >10?), we might say the merger doesn’t “substantially” lessen competition. The Merger Guidelines until 2010 endorsed this view by saying that market power was the unifying theme.

In the usual models, efficiency gains could result in a price decline despite the reduction in competition, not because of it—just as long as the cost savings accrue to the consumers rather than the producers. Efficiency gains could “rebut” the presumption of lessening competition only if it disrupted collusion or in other ways reduced industrywide market power. Previous Guidelines never made this distinction clear—probably because economists and lawyers could not agree on what competition meant, I suspect—and the ambiguity lurks in the cases.

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