Getting to "May Be" : Probability, Potential Competition, and the Clayton Act

Current merger review law is critically flawed. Courts in Clayton Act Section 7 cases consider the likelihood that a merger will harm competition as a threshold question before considering the size of harm that could ensue. Under current law, to block a merger a judge must find that the deal is likely to substantially harm competition. But this likelihood threshold is neither sound policy nor required by the law. The statute—barring mergers whose effects “may be substantially to lessen competition”—instructs courts to evaluate the likelihood and magnitude of harm that a merger could cause together, rather than separately. Considering likelihood without simultaneously weighing magnitude is to miss half the story. Courts should instead bar mergers whose expected effect, multiplying likelihood of harm by magnitude of harm, is to significantly harm competition. Replacing the likelihood threshold with an expected-effects test will bring merger review in line with the statutory text and with decades of economic evidence. Applying an expected-effects test will also fix our broken potential competition doctrine. Because it is often impossible to show that a merger between a dominant firm and its potential rival is more likely than not to significantly harm competition, the Clayton Act is a dead letter as applied to such mergers. Discarding the likelihood threshold reveals how harmful many such mergers are on average, and will address the growing problem of incumbents buying their startup competitors.To implement this test, I propose a new structural presumption for mergers between incumbents and potential rivals. The test stays within current statutory language and uses a simple screen to target the mergers that pose the greatest threat of blocking future competition. I argue that courts should use the presumption only when (1) one of the merging parties has a dominant market share in a concentrated market, (2) there are significant barriers to entry, and (3) there are non-speculative reasons to believe the potential competitor may enter the market in a reasonable period of time. These three prongs are an effective proxy for predicting the merger's expected effect on competition. When a merger satisfies all three conditions, courts should hold it presumptively illegal