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The Political Economy of Merger Regulation Author(s): Aditi Bagchi Source: The American Journal of Comparative Law, Vol. 53, No. 1 (Winter, 2005), pp. 1-30Published by: American Society of Comparative LawStable URL: http://www.jstor.org/stable/30038686Accessed: 27-02-2015 06:37 UTC

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ADITI BAGCHI

The Political Economy of Merger Regulation

Free market ideology comes to merger regulation from two sides. On the one hand, proponents of free markets desire as much competition as possible and expect the government to ensure that no player dominates the field. On the other hand, neo-liberals are wary of any government intervention in the market; if the market demands that two companies merge, who is the government to object? Market rhetoric therefore cuts both ways.' This basic ambiguity in the free market faith enables competition authorities to invoke the spirit of the market no matter what they do. In fact, though all merger authorities are likely to pay respects to the market, merger review will usu- ally involve "elements of 'industrial policy'" too.2 Because neither an activist nor a laissez-faire merger authority is transparently anti- market, industrial policy might motivate merger regulation in a wide range of political environments. Nevertheless, industrial policy is more important to merger regulation in the European Union than it is in the United States.

I will try to explain some essential differences between US and EU merger policy by comparing the political institutions that make and enforce these policies and the economic environment in which those institutions operate. Specifically, I will argue that a critical factor motivating antitrust policy is the distribution of 'producer benefits,' which include employment and tax revenue. Because the United States is highly economically integrated on the supply side as well as the demand side, national firms distribute producer benefits

Associate, Cravath, Swaine & Moore LLP. J.D. Yale Law School, 2003; M.Sc. Oxford University, 2000; A.B. Harvard College, 1999. Many thanks to George Priest, Georg Reitboeck, Alec Stone Sweet and James Whitman for comments and suggestions.

1. For a discussion of the use and abuse of efficiency-talk in competition policy, see Daniel J. Gifford & Robert T. Kurdle, Rhetoric and Reality in the Merger Stan- dards of the United States, Canada, and the European Union, 72 ANTITRUST L.J. 423, 428-34 (2005).

2. Industrial policy concerns include: "adverse effects on domestic enterprises; employment consequences; preserving the separate identity of leading local companies and creating (or preserving) national champions; enhancing the international competitiveness of domestic enterprises involved or threatened; and minimizing regional dislocations or creating new development opportunities within the country." Donald Baker, Antitrust Merger Review in an Era of Escalating Cross-Border Trans- actions and Effects, 18 Wis. INT'L L.J. 577, 578 (2000). See also Paul Stephan, Global Governance, Antitrust, and the Limits of International Cooperation, 38 CORNELL INT'L L. J. 173, 178 (2005) ("Competition policy ... fades into industrial policy.").

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2 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 53

widely across the country and a mobile workforce follows production. Because the United States is also highly politically integrated, producer benefits are redistributed still more widely through cross-state transfers and subsidies. Under these conditions, the focus of merger policy can shift from producer benefits to consumer benefits. By contrast, the EU Commission is an intergovernmental institution that must ensure that producer benefits in important industries are dis- tributed widely across EU member states.3 It would be politically un- acceptable to have a dominant firm associated closely with a single member state, or worse yet, a foreign state.

This logic is consistent with the development of antitrust law in the United States. The populist movements behind the Sherman and Clayton Acts were driven more by states that did not host national monopolies and therefore had the most to lose from the decline of local producers. At that time, federal fiscal policy (and geographic re- distribution) was less important relative to state-level economic management. As the nation integrated economically and politically, policy and then enforcement became increasingly national and consumer-oriented.

The current political economy of merger regulation in the Euro- pean Union is comparable to the earlier dynamic of antitrust law in the United States. Merger regulation is unlikely to concern itself exclusively or even primarily with consumer interests, as opposed to competitor interests, so long as there is a lag between consumer market integration and producer market integration.4 This lesson from the history of EU and US antitrust law also bears on the prospects for global competition policy where the political momentum behind free trade exceeds that behind factor mobility.

One implication of the explanatory theory offered here is that it is misleading to reduce competition policy to prevailing economic theory. Richard Posner suggests that competition policy in the United States has in fact largely tracked economic theory.5 But if they have developed together, there is nevertheless cause to doubt a simple causal relationship between economic theory and competition policy. Posner's view implies that the ends of antitrust law have remained constant since the last century; we have only perfected the regulatory means over time. Such a view not only fails to do justice to the his-

3. When economies of scale are such that there is only room for a single dominant firm in the Union, we should expect politically supported Euro-champions like Airbus.

4. There is a lag between consumer and producer market integration where firms' sales are more dispersed across borders than their factors of production.

5. Cf Richard Posner, Antitrust in the New Economy, 68 ANTITRUST L.J. 925 (2001) ("Looking over the entire history of U.S. antitrust law, I conclude that the most powerful explanatory variable is simply the state of economic opinion."). Posner does not attempt to generalize the point for antitrust law throughout the world.



2005] POLITICAL ECONOMY OF MERGER REGULATION 3

tory of antitrust law within the United States,6 it also cannot plausi- bly explain variation in competition policy across jurisdictions. Holding the purposes of competition policy fixed across space as well as time, we must assume that Europeans simply lack Americans' prowess in economic theory, or we must attribute strange motivations to European regulators.7 In fact, "the debate over whether antitrust is to pursue economic or social goals" is not quite "finished."8

While most competition authorities will perceive their goals as economic in character, most - perhaps even in the United States - will not perceive those goals altogether lacking in a "social" aspect. The immediate economic ends of competition policy depend on the larger social goals facing law-makers and regulators in a given time and place. Hence, the European Union's rejection of the Chicago School's admonitions regarding competition policy reflected neither misunderstanding nor myopia. Sir Leon Brittan, Commissioner for Competition policy when the 1989 merger regulation was adopted, concluded that "[t]he 'Chicago School' approach currently in favor in the USA is not directly relevant to EC competition policy. Chicago does not need to worry about creating a single market. Rather, it presupposes the existence of an integrated market."9 As I will show below, competition policy has served the European project of integration not just by opening markets directly10 but also by sustaining the political bargain on which integration depends.

In Part I below I describe doctrinal differences between EU and US competition policy. Specifically, EU antitrust law has been more focused on competitor than consumer harm because of the broader (incomplete) project of integration of which it is a part. In Part II, I argue that enforcement of EU competition policy is essentially political due to certain intergovernmental features of the European Com- mission. The intergovernmental aspects of the European Commission reflect incomplete political integration, and combined with incomplete economic integration, have resulted in producer-oriented competition policy. In Part III, I show that US antitrust policy

6. See infra, Part III. 7. See, e.g., Fred McChesney, Talking 'Bout My Antitrust Generation: Competi-

tion For and In the Field of Competition Law, 52 EMORY L.J. 1401, 1434 (2003) ("The Europeans are antitrust newcomers, and so will only justify their existence by impos- ing more restrictive rules than the American federal enforcers. A mere 'me too' atti- tude hardly justifies a separate European presence in global antitrust." ).

8. Id. at 1407. McChesney concludes that the debate is finished, at least in the United States, as marked by the "demise of per se rule of illegality and the concomi- tant rise of the Rule of Reason." Id. at 1408.

9. SIR LEON BRITTON, EUROPEAN COMPETITION POLICY: KEEPING THE PLAYING- FIELD LEVEL 3 (1992).

10. See Mario Monti, EU COMPETITION POLICY AFTER MAY 2004, Fordham Annual Conf. On Int. Antitrust Law and Policy (New York, Oct. 24, 2003) (discussing how merger control has fostered liberalization in the energy and telecommunications sectors).




was similar to present EU policy when American politics and economy were incompletely integrated. In Part IV, I discuss the implications of my theory for proposed international antitrust law and enforcement. In my conclusion, I consider the applicability of the theory to non-federated states - i.e., the majority of jurisdictions. Fi- nally, I return to the EU case to suggest that the prospects for orienting competition policy toward consumers under the new regulations"1 effective since May 2004 depends on the larger project of integration of which competition policy has always been but one - albeit significant - part.

I. COMPARATIVE DOCTRINE

Commentators have recognized certain basic differences between US and EU merger doctrine. The goals of U.S. antitrust laws are to promote competitive markets that will drive down consumer prices. The purposes of the European Union's competition laws are more expansive, and thus far, have appeared to incorporate the larger community goals of strengthening economic and social cohesion and promoting "a harmonious balance and sustainable development of economic activities."12 More cynically, American regulators focus on the effects of mergers on consumers, while European regulators have focused on their effect on competitors.13

A. The Regulatory Standard

The primary European test for merger approval under the 1989 Merger Regulation was whether a proposed merger would "create[ ] or strengthen[ ] a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it."14 While US regulators are interested in the expected effect of a merger on prices, "the European Commission [has] normally disapprove[d] a merger or impose[d] regulatory conditions if the merger significantly enhance[d] the market share of a dominant firm, create[d] joint dominance, or seriously distort[ed] the

11. Council Regulation (EC) No. 139/2004 of 20 January 2004 on the Control of Concentrations between Undertakings (the EC Merger Regulation).

12. Treaty Establishing the European Community, Feb. 7, 1992, O.J. (C224) 1 (1992), 1 C.M.L. R. 573 (1992). See also Per Jebsen and Robert Stevens, Assumptions, Goals and Dominant Undertakings: The Regulation of Competition under Article 86 of the European Union, 64 ANTITRUST L.J. 443 (1996).

13. See Kevin Guerrero, A New 'Convincing Evidence' Standard in European Merger Review, 72 U. CIN. L. REV. 249, 270 (2003); Ricky Rivers, General Electric/ Honeywell Merger: European Commission Antitrust Decision Strikes a Sour Note, 9 ILSA J. INT'L COMP. L. 525, 527 (2003).

14. Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the Control of Concentrations between Undertakings, 1989 O.J. (L 395) 1, amended by Council Reg- ulation (EC) No 1310/97 of 30 June 1997.




playing field for competitors."1 While the United States looks for corporate behavior that might undermine consumer welfare, the Euro- pean Union has been "sensitive to a wider range of single-firm conduct, especially when the 'dominant' firm's rivals are significantly smaller."16

The US horizontal merger guidelines provide specific steps by which the Federal Trade Commission and Department of Justice are to evaluate a proposed merger. First, they will define the relevant product market for each firm. Second, if their markets overlap, they will consider concentration levels and the likelihood of anticompetitive effects. Next, if there are concerns about concentration and di- minished competition, officials will consider mitigating factors, such as the ease of future entry, whether one of the parties is at financial risk, and whether there are potential efficiencies from consolidation.17 European merger guidelines of 1989 provided essentially a two-prong test for illegality: first, creation or reinforcement of a market dominance position, and; second, resulting market power capable of significantly impeding effective competition in a relevant market.18

The difference in attention to consumer welfare versus market dominance was manifest in the two regimes' respective treatment of efficiencies that mergers may generate. Early decisions by the Su- preme Court interpreted Sec. 7 of the Clayton Act to forbid considerations of efficiency when assessing the impact of a merger on competitive conditions. But the Court eventually reversed its position,19 and "federal enforcement bodies have made it clear that demonstrated claims of efficiencies produced by a merger can have a very positive impact on a merger's chances of being approved."20 Sec- tion Four of the DOJ Horizontal Merger Guidelines explicitly gives credit for such efficiencies.

By contrast, the 1989 EC Merger Regulation did not mention efficiencies as such. The first prong of Article 2, which set forth the regulatory standard under the 1989 Regulation,21 emphasized "the

15. Eleanor Fox, Global Markets, National Law, and the Regulation of Business: A View from the Top, 75 ST. JOHN'S L. REV. 383, 395 (2001).

16. Michael Jacobs, Mergers and Acquisitions in a Global Economy: Perspectives from Law, Politics, and Business, 13 DEPAUL Bus. L.J. 1, 7 (2000-1).

17. 57 Fed. Reg. 41,552 (1992), amended 1995. 18. 1989 Regulation, supra note 14. 19. FTC v. Procter & Gambling Co., 386 U.S. 568 (1967), and United States v.

Philadelphia National Bank, 374 U.S. 321 (1963), rejected efficiency considerations. But since Continental T.V. Inc v. GTE Sylvania, 433 U.S. 36 (1977), the Court has begun to consider efficiency gains in antitrust cases. No other mergers have since reached the Supreme Court.

20. Eric Stock, Explaining the Differing U.S. and EU Positions on the Boeing/ Douglas Merger: Avoiding Another Near-Miss, 20 U. PA J. INT'L ECON. L. 825, 864 (1999).

21. The 1989 regulation initiated EU merger regulation. Previously, competition policy was limited to monopolies and collusion. The Commission attempted to ad- dress the apparent gap in its authority by extending application of Articles 81 and 82




need to maintain and develop effective competition." Consumer interests were but one of a number of factors "to be taken into account" under the second prong; they were not the ultimate object toward which the entire test was oriented. Moreover, the second prong provided that "technical and economic progress" would act as an amelio- rating factor only when it was both in the interests of consumers and would not impede competition.22

Indeed, Sir Leon Brittan, Commissioner for Competition policy when the 1989 regulation was adopted, stated forthrightly that "in a competitive market, mergers may or may not give rise to technical and economic progress. In an uncompetitive market, even if they do, they will not be allowed."23 Under the 1989 regulation, the Commis- sion may even have treated mergers that contributed to economic efficiency as "more likely to create a dominant position."24 Efficiency- enhancing mergers were suspect.

Not only has the European Union been more concerned with single-firm dominance, but not coincidentally, much lower market shares have given rise to greater concern about market dominance in

(then Articles 85 and 86). See European Commission, MEMORANDUM ON THE PROBLEM OF CONCENTRATION IN THE COMMON MARKET (1966). In Case 6/72, Europemballage Corp. and Continental Can Co. Inc. v. Commission, 1973 E.C.R. 215, 1973 C.M.L.R. 199, the Commission challenged a merger under Article 82 but lost on technical grounds. The Commission applied Article 81 to a merger in Case 142/84, 156/84, Brit- ish American Tobacco Co. Ltd. and R. J. Reynolds Indus., Inc. v. Comm. of the Eur. Union, 1987 E.C.R 4487, 2 C.M.L.R. 551 (1987). However, the ensuing controversy rendered the case an ambiguous victory. The debate culminated in the adoption of the 1989 regulation, and it has never been resolved whether the Commission would otherwise have authority to regulate merger directly under Treaty provisions.

Interestingly, the Treaty of Rome, the sole source of EU authority in the realm of competition law before the 1989 regulation, itself appears focused on market dominance and relegates potential consumer benefits as secondary, optional considerations. This is evident in the structure of Article 81. Article 81(1) flatly prohibits agreements that restrict or distort competition and Article 81(2) provides that agreements prohibited by 81(1) are automatically void. Article 81(3) permits the Commis- sion to exempt from Article 81(1) agreements with certain pro-competitive effects; consumer benefits of a merger have since been treated as exceptional pro-competitive considerations under this provision. Thus, antitrust principles laid out in the found- ing document of the European Union already anticipated a competitor-oriented regulatory regime.

The operation of Article 81 was substantially altered when Regulation No. 1/2003 replaced Regulation No. 17/62 on May 1, 2004. See Florian Schumacher, Legislative Development: Council Regulation (EC) No 1/2003 of Dec. 16, 2002 on the Implementa- tion of the Rules on Competition Laid Down in Articles 81 and 82 of the Treaty, 9 COLUM. J. EUR. L. 480, 481 (2003).

22. 1989 Regulation, supra note 14. 23. Stock, supra note 20, at 868. 24. Id. at 870. See also Calvin S. Goldman, Irene Knable Gotts, and Michael E.

Piaskoski, The Role of Efficiencies in Telecommunications Merger Review, 56 FED. COMM. L.J. 87, 92 (2003) (so far, "efficiencies have been more of a detriment than a benefit to merging entities").




the European Union than in the United States.25 Part of the difference in concern about the market shares of the dominant firm may be contingent on the relative newness of EU market integration. Since the EU begins as a less integrated market, it would be expected that firms will start out with relatively low EU-wide market shares. But it should be an expected sign of integration that with the rise of truly European firms, EU-wide market shares for the largest, most efficient firms will rise. This market process creates problems, however, for companies that fare badly in the expanded field of competition, and for all their various stakeholders.

EU and US merger regulations also differ in their respective de- grees of specificity. While the US guidelines detailed a step-by-step process for evaluating mergers, the EU 1989 regulation listed a number of factors that the Commission was directed to consider.26 The EU merger guidelines were widely considered vague, and the resulting "uncertainty and lack of predictability in the application of rules" gave rise to tensions.27 The regulations probably lacked specificity in the first place because, though set forth by the Commission, they had to pass through the fractured and veto-ridden decision-making process of the Council of Ministers and European Parliament. Their vagueness indirectly expands the enforcement authority of the Commission.

While the Commission's authority was thus indirectly enhanced by the role of the intergovernmental branches of the European Union, the comparatively limited role of the most supranational branch - the judiciary - reinforces the Commission's executory powers. The fact that the Commission, unlike its US counterparts, has the power to enforce its decision without going to a court only expands its 'prosecutorial' discretion.28 We should expect the scope of its discretion within such a regulatory structure to correlate with the extent of judicial review. Indeed, after a string of court defeats,29 the Commis- sion decided to institute as the central element of merger policy re-

25. Stock, supra note 20, at 844. Market shares over 50 percent may result in a presumption of dominance. See, e.g., Case C-62/86, AKZO Chemie BV v. Comm'n, 1991 E.C.R. 1-3359, 1-3453, [1993] 5 C.M.L.R. 215, 279.

26. See 1989 Regulation, supra note 14, at Article 2. 27. Barry Rodger, Competition Policy: Liberalism and Globalization: A European

Perspective, 6 COLUM. J. EUR. L. 289, 306 (2000). See also Goldman et al, supra note 24, at 105 ("The ECMR merger review framework operates under standards less explicit than those established in the Untied States."); Crystal Jones-Starr, Community- wide v. Worldwide Competition: Why European Enforcement Agencies Are Able to Force American Companies to Modify Their Merger Proposals and Limit Their Inno- vations, 17 Wis. INT'L L.J. 145, 154 (1999) (Commission exercises vast discretion as a result of lack of specificity in regulation).

28. Eric Hochstadt, Note, The Brown Shoe of European Union Competition Law, 24 CARDOZO L. REV. 287, 298-299 (2002).

29. Francesco Guerrera, Brussels Prepares for Competition Overhaul, in FIN. TIMES, Dec. 4, 2002. But see, Christopher Brown-Humes and Francesco Guerra, Brus- sels Appeals over Merger Ruling, in FIN. TIMES, Dec. 21, 2002, at 6 (Commission at-




form a clearer guideline that mergers that allow one firm over 50 percent market share will rarely be approved.30

B. Goals

European regulators' emphasis on market share and abuse of dominance betrays an attention to the interests of competitors as much as those of consumers. Karel Van Miert, EU Competition Com- missioner from 1993 to 1999, stated:

"The aims of European Community's competition policy are economic, political, and social. The policy is concerned not only with promoting efficient production but also achieving the aims of the European treaties.. .To this must be added the need to safeguard a pluralistic democracy, which could not survive a strong concentration of economic power. If competition policy is to reach these various goals, decisions must be made in a pragmatic fashion, bearing in mind the context in which they are to be made. .."31

The goal of protecting competitors is therefore perceived as part of the larger political and social project with which the Commission is charged.

The Commission is open about the fact that its competition policy serves a multiplicity of purposes. Listed among the objectives of Competition Policy in the Executive Summary of the 1996 Annual Report on European Competition Policy were the "Community objectives set out in Article 2 of the Treaty, including the promotion of harmonious and balanced development of economic activities, sustainable and non-inflationary growth which respects the environment, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion." The Commission therefore may look justifiably to the many social interests at stake in mergers. "This decision-making does not take place in a political vacuum."32

Unlike American law, which advances "efficiency through markets anchored (for example) by an aggregate wealth or a consumer welfare paradigm," which Eleanor Fox calls "efficiency law," the Com- mission's broad mandate produces "law to advance goals such as preserving a society of small business, protecting small firms from exploitation and exclusion by dominant firms, providing fair access to markets, and setting fair rules of the game," what Fox calls "fairness

tacks court rulings). For a discussion of the revamping of merger regulation triggered by the succession of court defeats, see infra, Part V.

30. Francesco Guerrera, Mergers May Have to Satisfy New EU Rules, in FIN. TIMES, Dec. 9, 2002.

31. Karel Van Miert, FRONTIER-FREE EUROPE (May 5, 1993). 32. Baker, supra note 2, at 579.



20051 POLITICAL ECONOMY OF MERGER REGULATION 9

law."33 EU law "is designed to create common conditions of competition at high standards and equalize (i.e. raise outsiders') costs." The European Commission explains:

"Another reason for legislating at the Community level has been the need to create and maintain equal conditions for economic operators. Competition could be distorted if undertakings in one part of the Community had to bear much heavier costs than in another and there would be a risk of economic activity migrating to locations where costs were lower. ... The implementation of high common standards of protection is among the Union's objectives and at the same time helps to ensure this 'level playing field."'34 These concerns about the distribution of market share among

producers do not stem exclusively from a desire to protect small firms. States in federated systems have special cause to be concerned about mergers that will result in industry dominance by nationals of other states. The origins of merger regulation in the European Union, like the origins of the European Union itself, lie in the coal and steel sectors. Although the Treaty of Rome did not make explicit reference to merger regulation, "Article 66 of the [Treaty Establish- ing the European Coal and Steel Community] gave the High Author- ity the right to declare a merger in the coal or steel industry 'unlawful' and to prohibit it, if it so chose. This had been agreed specifically to 'control' any potential German domination of these two industries."'35

While geopolitical considerations obviously informed that concern, economic interests also motivated countries with domestically important coal and steel industries to support a strong merger policy. Domestic firms offer countries a variety of benefits, from tax revenue to headquarters employment; the decline of a domestic industry not only permanently eliminates those benefits but also poses additional transitional costs, since the economy suffers overcapacity while capital and human resources are shifted to a more profitable sector. In the United States, by contrast, not only does the integrated producer market diminish the costs of a change of control, but also, genuinely national regulation diminishes the influence of local interests on federal merger policy. Since competition law is not subject to the regime competition that might drive states to adopt laws hospitable to multinational corporations (because multiple states can claim competi-

33. Eleanor Fox, ANTITRUST AND REGULATORY FEDERALISM: RACES UP, DOWN, AND SIDEWAYS, 75 N.Y.U. L. REV. 1781, 1782 (2000).

34. Id. at 1792, citing WHITE PAPER: PREPARATION OF THE ASSOCIATED COUNTRIES OF THE CENTRAL AND EASTERN EUROPE FOR INTEGRATION INTO THE INTERNAL MARKET

OF THE UNION, COM (95) 163 final, p.213. 35. David Allen, Competition Policy, in POLICY-MAKING IN THE EUROPEAN UNION

169 (Helen Wallace and William Wallace eds., 1996).




tion jurisdiction over a merger),36 there is little visible economic pressure to counteract local producers' preference for a strong merger policy.

EU competition policy is often portrayed as serving integrationist purposes.37 This is partly true. Vigorous - even excessive - enforcement of antitrust law does ensure cross-border access to consumer markers. The Commission and its powers are also essential symbols of integration, and if its policies and decisions were re- peatedly incongruent with various member state interests, its merger authority would be in jeopardy. In particular, where the distribution of producer benefits is highly skewed, nations are likely to resent a high level of consumer market integration. But the Commission's characteristically intergovernmentalist attention to national producer interests reveals that even the so-called "engine of integration" must pay homage to the borders it aspires to erase.

II. POLITICIZED EU ENFORCEMENT

When the Council of Ministers issued the 1989 regulations on December 21, 1989, Commissioner Karel van Miert acknowledged that the Commission "must take into account the realities of the current economic, social and political environment.3"" If there was any doubt as to whether the Commission would approach its competition powers as primarily economic regulation or as one element of a broader vision for the EU, van Miert eliminated that doubt by adopt- ing a clear position. He declared: competition policy "is not an end in itself to be pursued dogmatically; it is an instrument, albeit an important one, for achieving agreed Community objectives.""39 Not only does EU merger doctrine aim to maintain a fair balance of producer benefits across member states, enforcement policies ensure this result.

The first case that set off great controversy about the aims of EU competition policy was the prohibition of a merger between Boeing and McDonnell Douglas. The civil aircraft industry has never operated in a free market,40 but there was concern that, due to its far- flung jurisdiction, competition policy might begin to be used as a new

36. Fox, supra note 33, at 1789. 37. See Desmond Dinan, EVER CLOSER UNION? 373 (1994) ("Competition policy

has a political purpose in the Community that goes far beyond its economic objective in the United States as well as policing the marketplace; Community competition policy seeks to break down barriers between national markets, thereby promoting Euro- pean integration.").

38. Jones-Starr, supra note 27, at 152. Van Miert was Commissioner for Trans- port before he became the Competition Commissioner in 1993.

39. Manfred Neumann, COMPETITION POLICY: HISTORY, THEORY, AND PRACTICE 42 (2001).

40. See Stock, supra note 20, at 836.




political weapon in the industry.41 Unsurprisingly, the Commission dismissed allegations by two US senators that its merger process dis- criminated against US firms for protectionist ends.42 It is at least likely that the policy reflects no special animus against the United States.

More recently, the EU blocked the GE-Honeywell merger, in part because the merger would have generated efficiency advantages that would disadvantage its European competitors.43 The Commission can advance European producer interests even without ultimately blocking a merger. It may require significant disinvestments, as in the merger between AOL and Time Warner, which was restructured to avoid control over the German media group Bertelsmann AG. The subsidiary merger between TW and EMI was blocked, preventing "AOL from having access to Europe's leading source of music publish- ing rights."44 Producer interests are especially compelling where they map out control of 'culture industries.'

The mere fact that various cases can be explained in light of Eu- ropean producer interests does not demonstrate that regional interests motivated either merger policy or its enforcement. However, the Commission is ultimately a political body that could be expected to respond to distributive interests.

A. The Commission as an Intergovernmental Political Institution

Douglas Ginsburg and Scott Angstreich have pointed out that because "a merger that is globally welfare-enhancing may nonetheless entail a loss of welfare in a particular political jurisdiction," "a uniform system of merger control makes it more likely that some procompetitive mergers will be blocked."45 They point out that a policy that attends only to the aggregate effect of a merger on prices "would effectively propose that consumers in one place pay for benefits to consumers elsewhere."46 The trade-off between political jurisdictions is not limited to the disparate effect of a merger on consumer prices, however. Even if consumer markets are sufficiently integrated that consumers in all markets experience the benefits of an

41. See, e.g., Kenneth Hamner, The Globalization of Law: International Merger Control and Competition Law in the United States, the European Union, Latin America and China, 11 J. TRANSNAT'L L. & POL'Y 385, 396 (2002); Douglas Ginsburg and Scott Angstreich, Multinational Merger Review: Lessons from our Federalism, 68 ANTITRUST L.J. 219, 220 (2000); and Jones-Starr, supra note 27, at 165-9.

42. Jeffrey Peterson, Unrest in the European Commission: The Changing Lan- scape and Politics of International Mergers for United States Companies, 24 Hous. J. INT'L L. 377, 381 (2002).

43. Commission Decision, Case No COMP/M.2220, General Electric/Honeywell (July 3, 2001).

44. Mario Monti, European Competition for the 21st Century, 24 FORDHAM INT'L L.J. 1602, 1610 (2001).

45. Ginsburg and Angstreich, supra note 41, at 226-7. 46. Id.




efficiency-generated merger, in the absence of factor mobility and significant cross-border wealth transfers, citizens of some jurisdictions may experience a net loss from the merger because of its local effect on employment and tax revenue.47

The extent to which distributive effects will be accounted for in EU competition policy depends on whether the Commission resem- bles a national decision-maker more or less closely than an intergovernmental authority such as that contemplated by Douglas Ginsburg and Scott Angstreich. Although the Commission clearly has more national features than most international organizations, its expansive powers in the context of merger regulation hinge on its effective representation of individual member state interests, not the construction of a policy that subordinates those individual interests to a larger vision of the European community.

The Commission is capable of effectively disguising (or at least de-emphasizing) the prevalence of non-competition considerations by virtue of the vague guidelines under which it operates and its opaque institutional character. Indeed, German interests have pressed for an independent cartel office precisely because of "the political influence on competition policy and competition policy decisions which therefore lack transparency."48 Germany has charged that the Com- mission has approved mergers that should have been blocked, and that it has improperly applied social and industrial policy criteria to merger decisions.49 The happy consequence of discretion is the opportunity to incorporate national interests on a case-by-case basis in a manner that would be politically unpalatable if done openly.50

The European Commission consists of twenty-five members (one from each member-state) appointed by national governments for five- year terms; Commissioners pledge to act in community interests. Commissioners may resign but they cannot be recalled by member states. Nor do they step down when political patrons at home lose

47. In fact, producer-side effects of merger regulation may find more effective political expression than consumer interests because the former are often concentrated, while the effects of regulation on consumers is diffuse. The same dynamic in favor of organized producer interests is evident in the context of the more advanced but still ongoing effort to achieve a consumer-oriented trade policy - in Europe and elsewhere.

48. Rodger, supra note 27, at 308. 49. Mark Pollack, The Engines of Integration? Supranational Autonomy and In-

fluence in the European Union, in EUROPEAN INTEGRATION AND SUPRANATIONAL Gov- ERNANCE 237 (Wayne Sandholtz and Alec Stone Sweet eds., 1998).

50. Given that the national interests prevail for political reasons, it may not be obvious that the incorporation of national interests would be politically unpalatable. But this gets at the fundamental schizophrenia of the European Union, which clings to domestic structures and prerogatives even as it aspires to an "ever closer union." This schizophrenia might give national politicians in the Council of Ministers and the European Parliament leeway in their articulation of their agendas, but the Commis- sion is supposed to be a supranational institution. What goes for the quasi-legislative branches of the European Union does not go for its quasi-executive and judicial branches.




power. The European Parliament may dismiss the Commission by a two-thirds majority, but individual commissioners cannot be dismissed.

The Commission is divided into numerous directorates-generale. Most work is performed within these groups by civil servants, but final decisions of the Competition Directorate-Generale must be approved by the entire commission. Its decision may be appealed, ultimately to the European Court of Justice (ECJ).

Countries are insistent on national representation in the commission,5' and fight over which directorate-generale they are assigned.52 The Commission is often split between "the relatively interventionist commissioners and DGs responsible for industrial and technology policies, and the more laissez-faire commissioners and DGs responsible for competition and commercial policy."53 The politics of the Commission are thus driven by both ideology and geography.54

The Commission might be conceived as an agent on the part of member states; this model is justified since the member states negoti- ate the powers assigned the Commission and since Commissioners swear to advance their collective interests. But the Commission re- tains some autonomy to deviate from its formal mandate. The scope of this autonomy may be predicted from four factors: first, the distribution of preferences among member states; second, institutional decision rules governing delegation and sanctioning; third, the distribution of information or uncertainty among organizations; and fourth, whether there are transnational constituencies in a position to lobby it directly.55 In the area of competition policy, the Commis- sion might appear to exercise substantial discretion because member state preferences are diverse, especially in individual decisions; decisions rules are vague; sanctions from other EU institutions are not well graduated; and national producer interests may appeal to the Commission directly. As the Commission is commonly thought to propel market integration, this would lead us to expect a highly integrationist competition policy.

Yet the Commission has been decidedly more successful in the pursuit of consumer market integration than producer market inte-

51. At least in part for this reason, reform of the Commission that would decrease its size to make decision-making more practicable has proven politically unfeasible.

52. Dinan, supra note 37, at 200. 53. Pollack, supra note 49, at 219. 54. For a discussion of how the competence-maximizing, integration-propelling

interests of the Commission might be squared with its role as agent for Member States, see Mark Pollack, The Commission as an Agent, in AT THE HEART OF THE UNION? STUDIES OF THE EUROPEAN COMMISSION (Neill Nugent ed., 1997). For an account of the politicized environment of administration at the Commission, see Michelle Everson, Administering Europe? 36 J. COMMON MARKET STUDIES 195 (1998).

55. See Pollack, supra note 49.




gration; member states have been far more resistant to the integration of producer markets than of consumer markets. A lag between integration of these markets creates political pressure to limit the social pressures resulting from the integration process. Member state merger policy, which can break up dominance in local markets, might advance the end of consumer market integration by facilitating non- local producer access; but EU merger regulation, bounded by the sub- sidiarity principle, is more consequential for the integration of community-wide production. Merger regulations are therefore a kind of valve through which the pressure that consumer market integration creates for producer market integration can be released.

State aid is another such valve within the domain of EU competition policy. State aid has been used traditionally (and transparently) to advantage national champions over foreign competitors. But as aid has been challenged as an obstacle to integration and the free play of the market, states have re-characterized state aid as "the quid pro quo in the attempt to reconcile national industrial strategy with the need to adhere to EU competition rules." State aid is allegedly paid out as compensation to national actors disadvantaged by EU competition policy.56 State aid can therefore be said to facilitate the integration of the common market, since without it, market integration would be too socially disruptive. In fact, the Commission's state aid policy serves three principles: "competition, competitiveness and cohesion," which correspond to the objectives of "equity between EU member states, EU economic strength relative to the extra-EU international economy, and the spreading of the benefits of integration across member states."57 These objectives amount to a commitment either to protect producer interests ex ante or to compensate 'losers' ex poste. In the functionally similar context of structural funds, the Commission serves these objectives directly without having to de- volve the task of 'correcting' economic integration to member states. In both its state aid and structural funds policies, the Commission affirms the centrality of distributive politics.

B. Awareness of National Preferences

The Commission is likely to use its discretion in the service of relieving pressure on producer market integration both because it protects the jewel in the Commission's crown - consumer market integration - and because of direct influence by both member state governments and their national producer interests. But in order for the Commission to operate as an intergovernmental institution, it must appreciate national preferences.

56. Chris Rumford, EUROPEAN COHESION? CONTRADICTIONS IN EU INTEGRATION 154 (2000).

57. Id. at 155.




The Commissioners and their staff are well aware of national preferences. Nations signal their priorities both through national policies and their positions on related Commission initiatives. The Commission knows, for example, that the French blocked Coca-Cola's acquisition of the Orangina brand from French company Pernod Ri- card in September 1998 and again in November 1999 on the grounds that it violated French rules on concentration and threatened to dom- inate the domestic soft drink market.58 They are also aware of the fate of takeover doctrine, which fell far short of its integrationist am- bitions as a result of pressure from national producers.

C. Takeovers

Member states are wary of mergers for reasons related to their wariness of takeovers. Parties of both the left and center-right op- pose easy takeovers because of the effects on labor and national industry, respectively.59 I have referred to both of these interests as producer interests.

The 13th European Parliament and Council Directive on Com- pany Law Concerning Takeover Bids was proposed on January 19, 1989 to remove barriers to takeovers. The idea behind removing these barriers is to open the market for corporate control with the hope that the quality of management will improve. The initial propo- sal was too detailed, however, and met much opposition; it was shelved in 1994.60 The Internal Markets Commission revived the directive in 1996, modeling it after the British City Code on Takeovers and Mergers. It again faced a great deal of opposition, but by the end of 1999, most member states were willing to go along with it. The directive passed the European Council on June 19, 2000.

At this late stage - the directive had already been submitted to Parliament-the German corporate lobby managed to reverse the German position, and Germany withdrew its support in 2000. A coa- lition of MEPS proposed amendments that did away with the directive's force, allowing a variety of defensive measures and employment safeguards in the event of a change of control. Opposition grew to include several Italian and Spanish MEPS concerned about attempted stock purchases by a French state-owned utility company in foreign utility companies. On July 4, 2001, the European Parliament voted 273-273 on the directive, meaning failure.61

German opposition to the directive stepped up late in the process in large part as a response to British Vodafone's hostile acquisition of

58. William Hannay, Transnational Competition Law Aspects of Mergers and Ac- quisitions, 20 Nw. J. INT'L L. & Bus. 287, 291 (2000).

59. See Peterson, supra note 42, at 401-2. 60. See Scott Mitnick, Note, Cross-Border Mergers and Acquisitions in Europe:

Reforming Barriers to Takeovers, 1 COLUM. Bus. L. REV. 683 (2001). 61. Id.




German Mannesmann in 1999. There was substantial resistance to the takeover at the time; the $180 billion deal was one of three hostile takeovers (and the first foreign hostile takeover) in Germany since World War II. Since German firms issue less equity and are characterized by high shareholder concentrations, German firms are more difficult to take over without the cooperation of management and the present owner. Italy experienced similar discomfort in response to the bid by French LVMH Moet Hennessy Louis Vuitton SA to acquire Gucci, one year after it enacted takeover legislation. After LVMH had bought shares worth 34 percent of Gucci on the open market, Gucci refused LVMH board representation and rejected friendly acquisition. Instead Gucci issued stock equal to 42 percent of existing share capital and sold it to a white knight under a five-year standstill agreement, without asking for shareholder approval.62

Two years ago, after almost a decade and a half of resistance, the European Parliament approved a takeover directive, which was approved by the European Council in March 2004.63 The Directive came into force in May 2004 and member states must implement it by May 2006. But the Directive as passed achieves little by way of harmonization, instead setting forth certain minimum standards. Its two most important provisions are optional, and most member states appear poised to opt out of one if not both provisions.

The political impulse to protect national corporate management counteracts an economic trend in favor of cross-border hostile takeovers. Over the course of the 1990s, European acquisitions outside the common market increased from 8 to 17 percent; meanwhile, cross-border activity aimed at EU states stayed at about 14 percent. Legal and structural impediments to the takeover of European firms remain. In 1999, however, the combined value of takeover bids for Gucci, Telecom Italia and Paribas exceeded the combined worth of all previous European hostile bids from 1990 to 1998.64 As takeover bids become more frequent and forceful, governments offer more resistance on behalf of their national flagships. Chancellor Gerhard Schroeder declared in November 1999 that "hostile takeovers were never helpful because they destroyed corporate cultures and under- mined employees' commitment to their companies." Similar fear of losing French factors of productions prompted Francois Mitterand to say, in 1989, that: "if these takeovers continue like this, there will not

62. Id. at 683. 63. Council Regulation (EEC) No. 2004/25/EC of 21 April 2004 on Takeover Bids,

2004 O.J. (L142) 12. Article 12 makes Articles 9 and 11 optional. Article 9 requires member states to adopt rules that would prohibit boards of target companies from taking action, without shareholder authorization, that would frustrate an offer, as well as rules requiring boards of target companies to issue public statements assessing offers. Rules adopted under Article 11 would render unenforceable certain restric- tions on voting rights and on the transfer of the securities of target companies.

64. Mitnick, supra note 60.




be one French company capable of resisting the weight from overseas. These companies can count on me to put in place a system which will prevent the ruin of the French economy, prevent its pillage, especially within the Europe of 1993."65

European Commissioners and their staff surely understand the source of opposition to the Takeover Directive. They understand that national governments do not want to see their national champions taken over. Nor do they want them crowded out. This national resistance does not stem from procompetitive concerns. Rather, countries want to preserve employment, tax revenue, and other benefits of locally controlled production. Well aware of national preferences, we should expect these considerations to be a part of EU merger regulation.

D. Making of EU Merger Regulations

National governments also communicated their preferences in the course of the prolonged negotiations that took place before the merger regulations were ultimately adopted in 1989. The EC began efforts to enact merger regulations as far back as 1972. But in addi- tion to disagreement about the appropriate threshold level of turno- ver for EU jurisdiction, member states struggled to compromise on whether competition policy would be used as a means by which to protect national industries. In the 1980s, most commentators thought that EC antitrust policy invariably protected anti-competitive business arrangements for the sake of social and economic goals."66

Germany and Britain argued for reform, insisting on criteria that spoke only to competition.67 Others, led by France, "wanted to include social and industrial policies among the criteria which the commission would apply in assessing proposed mergers." With the exception of Article 2(1) of the regulation, which allowed the commission to consider the "development of technical and economic progress provided that it is to consumers' advantage and does not form an obstacle to competition," the final result68 was closer to the German and

65. Id., citing Jonathan Bruade, German Leader Cools Blasting of Vodafone, DAILY DEAL, Feb. 23, 2000; and David Berger, The European Markets Try to Coordi- nate. Unify Conflicting Merger Law, NAT'L L.J. Nov. 6, 1989, at 514.

66. J. Patrick Raines, Common Market Competition Policy: The EC-IBM Settle- ment, 24 J. COMM. MARKET STUD. 137 (1985).

67. Their motives for supporting liberal competition policy were probably some- what different. Britain already had a liberal competition policy and had a firm culture accustomed to mergers and acquisitions regulated in the name of the consumer alone. By contrast, Germany was used to protecting producer interests; but its firms were the powerhouses most likely to be labeled 'dominant' by a EU historically oriented to keeping Germany in its place, especially relative to France.

68. 1989 Regulation, supra note 14.




British position.69 But the Commissioner for Competition has consistently held that competition policy is bound up with other policies; the doctrine's attention to competitor interests itself reflects national producer interests; and as argued in this Part, the Commission has enforced regulations in a manner consistent with the original French vision. A policy defeat is not complete where the executor of the policy remains just as accountable to the loser as to the ostensible winner.

In the early years of issuing regulations establishing its authority, "the Commission was greatly assisted by the actions of the Court of Justice. These appeared consistently to interpret the competition provisions so as to enlarge the Commission's scope for intervention."70 More recently, however, the courts have reversed the Com- mission for its overly interventionist approach. The ECJ, known as the most politically autonomous branch of the EU, which is also deeply committed to a supranational agenda, may yet check the Com- mission's essentially intergovernmental approach to merger regulation. The move to court-driven competition policy would be new in Europe, but it was the early method of antitrust enforcement in the United States.71 The Sherman Act envisioned acts by general law rather than by administrative discretion.72 It relied heavily on private and state enforcement under federal law in federal courts. Later, the Clayton Act would provide a procedure under which the DOJ would have to go to the courts to enjoin proposed mergers, and FTC rulings would be appealed in federal appellate courts. The federal bureaucracy was relatively small and underdeveloped at the turn of the last century, and it is likely that regulation would not have been perceived as legitimate without an extensive judicial role.

In those areas of transnational exchange in which the ECJ plays a greater role, the elaboration of binding rules can propel integration.73 To the extent that the ECJ takes on this role in monitoring Commission merger regulation and enforcement, we might expect greater producer market integration. Until recently, however, the Commission reigned in the area of merger regulations with little judicial scrutiny. It was influenced instead by the vocal and member- state driven Council of Ministers and European Parliament, and as important, by the influence that member states and national producers exercise over its everyday decision-making in the area of merger regulation. The influence of these lobbies does not hinge on overt de-

69. Pollack, supra note 49, at 235. 70. Allen, supra note 35, at 164 71. Rodger, supra note 27, at 290. 72. Id. at 298. 73. See Alec Stone Sweet & James Caporaso, From Free Trade to Supranational

Polity: The European Court and Integration, in Sandholtz et al eds., supra note 49, at 92.




mands for the protection of particular firms. Rather, influence can be fairly inferred from the history of national policy preferences, the character of the Commission as an entity necessarily responsive to national preferences, and the subsequent manifestation of those preferences in EU merger policy.

III. DEVELOPMENT OF US ANTITRUST

US merger regulation looked a lot like EU regulation for much of its history. Antitrust legislation began as a means by which to protect small, especially Midwestern, producers from Eastern-dominated trusts.74 However, present US merger policy reflects little concern for the regional dislocations created by mergers and consolidations. This development was only possible because the policy area came to be dominated by the executive and judicial branches, which are least subject to regional politics.

The Antitrust Division of the Department of Justice enforces the Sherman Act and, together with the Federal Trade Commission, the Clayton Act. In order to block a merger, the DOJ must commence action in court. Its Antitrust Division is headed by a presidentially appointed assistant attorney general. The FTC is an independent regulatory agency with full authority to investigate, prosecute and adjudicate applications for merger approval. Decisions by an Admin- istrative Law Judge in favor of the prosecuting arm of the FTC may be appealed to the full commission, and then a federal appeals court. The FTC is headed by five commissioners appointed by the President for seven-year terms, and they can only be removed 'for cause.'

States in America look out for producer interests in their respective jurisdictions. But the advanced economic integration of the United States, as well as the truly national structure of the federal government, limit both the incentive and the ability of states to push a highly interventionist merger policy that would work to the advan-

74. A number of scholars would reject this account of the origins of competition policy in the United States. See, e.g., Robert Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & ECON. 7 (1966); Frank Easterbrook, Workable Antitrust Policy, 84 MICH. L. REV. 1696 (1986). My ambition here is not to resolve the long- standing debate about the legislative history of the Sherman Act and other antitrust laws. It may be that the legislative purpose we should assign to those statutes does not reduce to the actual political motivations behind them. Although my argument will be more compelling to those who are persuaded that competition policy was initially motivated primarily by producer interests, even those who believe that United States merger regulation was always motivated by efficiency considerations can agree that (1) United States competition policy has become substantially more consumer- oriented over time; and (2) the rhetoric of American antitrust policy has become more uniformly consumer-oriented over time. My theory does not depend on the view that consumer interests were initially unimportant in the United States; after all, consumer interests are not unimportant in the European Union today either. I seek to explain the relative importance of consumer interests to merger regulation in different jurisdictions, at different times.




tage of various local interests. It may be that "the states consistently take a more aggressive stand than the national authorities, defining product and geographic markets more narrowly, downplaying the prospect of post-merger entry into the market, and refusing to consider efficiencies as a factor offsetting increased competition" because "[a]t bottom, the states are more likely to be concerned with a merger's local impact upon jobs, and may also be influenced by concern for a local competitor."''75 But state dependency on a local producer is limited by the federal system of tax and transfer, and remaining benefits are unlikely to correlate with dominance of the local consumer market by a single out-of-state competitor. Even where states choose to pursue antitrust remedies, they must go to the courts, which are relatively shielded from the local producer lobby. In practice states work together or with the federal government where a merger has implications beyond single states, and are usu- ally only involved where there is a specific local market issue.76 The national government, i.e., the DOJ and FTC, dominates antitrust; these agencies are minimally influenced by particular regional interests. If an area is hit particularly hard by industry consolidation, a wide range of assistance is available through the appropriations process.77

A. Motivations Behind the Sherman Act

The original text of the Sherman Act prohibited arrangements "made with a view, or with the end to prevent full and free competition. . ., or which tend to advance the cost to the consumer." This language was replaced by the Judicial Committee with common-law language against "contract. . .in restraint of trade" and firms that "monopolize, or attempt to monopolize.. .trade" in the bill passed by Congress with almost unanimous support in 1890.78 Even Sherman's own faction, who supported the reference to consumer costs, was

75. Ginsburg & Angstreich, supra note 41, at 228. Richard Posner thinks states should no have antitrust legislation and be stripped of their current power under the Hart-Scott-Rodino Antitrust Improvement Act (15 U.S.C. 15c-15h (2000)) to bring suits antitrust suits parens patriae under federal law, in part because competitors, especially in-state corporations lobbying against out-of-state corporations, politicize the process. Richard Posner, supra note 5, at 940-941. See also Robert Hahn & Anne Layne-Farrar, Federalism in Antitrust, 26 HARV. J.L. & PUB. POL'Y 877 (2003).

76. See Harry First, Delivering Remedies: The Role of States in Antitrust Enforce- ment, 69 GEO. WASH. L. REV. 1004 (2001). The recent rise in state antitrust activity may suggest that states will not only piggy-back on federal initiatives but also step in as back-up police where federal enforcement appears lax to a substantial portion of the antitrust bar. If the perception, and the resulting growth in state antitrust de- partments, is sustained over time, the relationship between federal and state enforcement authorities eventually will be rewritten. As the federal experience shows, it is easier for states to grow administrative capacity than to shed it.

77. The legislative branch, i.e., Congress, can be expected (indeed, was designed) to be more solicitous to regional interests than the executive and judicial branches.

78. Rudolph Peritz, COMPETITION POLICY IN AMERICA (REV. ED.) 13-4 (1996).




more concerned with "industrial liberty" than consumer prices.79 "'Liberty' meant freedom from market power"s80 and was a property of producers not consumers.

Much of the opposition to Sherman came from those who advo- cated collusion as a sometimes necessary means of achieving a "fair price."s1 But the majority that overwhelmingly passed the Sherman Act was concerned primarily with protecting local producers from abuse by their bigger national counterparts.82 Since local, non-trust producers were small, the regional antitrust impulse was bound up with the protection of small producers. "[S]mall businesses and en- trepreneurs were favored and protected against the 'encroaching economic leverage' of larger competitors, even if the result was increased costs to the consumer.""83 Congressman William Mason admitted during House debates on the Sherman Act that "trusts have made products cheaper. . .but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to the people of this country by the 'trusts' which have destroyed legitimate competition and driven honest men from legitimate business enterprises."84 As in Europe, competition policy did not originate as a consumer-oriented body of law.

Some states had attempted local protection on their own. For example, state laws tried to control railroad rates under the influence of the Granger movement, which began in 1867 and peaked at about 1873.85 This kind of ex post intervention was not comparable to effective power to enjoin monopolies, cartels, or collusion. States had trouble even conducting effective investigations against out-of-state corporations.86 "Although state antitrust laws could conceivably protect local competition, the new industrial combinations operated nationally. .. national legislation was the only realistic solution to the larger monopoly problem."87 Moreover, it was very easy for trusts to win over the political leadership of a state.88 Some states even passed incorporation statutes inviting trusts and holding companies

79. Id. at 15. 80. Id. at 17. 81. Id. at 18. 82. Mark Roe suggests that the Sherman Act can be seen as Congress' response to

New Jersey's liberalization of its corporate law in order to become the most hospitable to monopolists. Mark Roe, Delaware's Competition, 117 HARV. L. REV. 588, 609 (2003).

83. Hamner, supra note 41, at 391. 84. Thomas Dilorenzo, The Origins of Antitrust: An Interest-Group Perspective, in

THE RISE OF BIG BUSINESS AND THE BEGINNINGS OF ANTITRUST AND RAILROAD REGULA-

TION, 1870-1900 70-1 (Robert Himmelberg ed., 1994). 85. George Stigler, The Origin of the Sherman Act, in Himmelberg ed., supra note

84, at 377. 86. Bruce Bringhurst, ANTITRUST AND THE OIL MONOPOLY 105 (1979) 87. Id. at 3. 88. Id. at 7.




to set up in their own backyard, which had the circular effect of rein- forcing the hospitality of state antitrust law.89

State opposition to trusts was motivated in large part by the pressure of local producers. The Grangers and the Farmers' Alliance were the first main agitators for antitrust laws. Their objectives were first, "the promotion and protection of relatively small farms that were having trouble competing with 'giant wheat farms"' and second, "the regulation of railroad rates" which currently favored the trusts. The Agricultural Alliance and Wheels denounced trusts, especially alleged jute bagging and binder twine trusts, for similar self- interested reasons. In the 51st Congress, which passed the Sherman Act, 64 antitrust petitions were recorded in the congressional record. "The greatest vehemence was expressed by representatives from the Mid-West."90 Between 1890 and 1896, every major wheat producing state elected a populist governor except California (which had a more diverse economy).91 Antitrust politics were driven by state-level producer interests.

The Sherman Act passed after thirteen states had already passed antitrust laws.92 Consumer interests fail to explain the pattern.93 Over half (14 of 26) of the states with a below average share of potential monopolists (correlating with a high concentration of small businesses) passed state antitrust laws before 1890. Of the 16 with an above average share of potential monopolists, only three had passed antitrust laws before 1890.94

B. Motivations Behind the Clayton Act

Although the Sherman Act is the 'father' of competition policy in the United States, Section 7 of Clayton Act is the principal statute regulating mergers. It forbids mergers and acquisitions "where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substan-

89. Peritz, supra note 78, at 10. 90. Dilorenzo, supra note 84, at 65. 91. Michael Magliari, Populism, Steamboats, and the Octopus: Transportation

Rates and Monopoly in California's Wheat Regions, 1890-1896, in Himmel, note 84, at 181.

92. Dilorenzo, supra note 84, at 68. 93. States with dates of passage before 1890 include: Maryland, Tennessee, Ar-

kansas, Texas, Georgia, Indiana, Iowa, Kansas, Maine, Missouri, Montana, Ne- braska, North Carolina, North Dakota, South Dakota, and Washington. Between 1890-1900, the following states passed antitrust laws: Kentucky, Louisiana, Missis- sippi, Alabama, Illinois, Minnesota, California (1893), NY (1897). Between 1900-1929: Connecticut, Florida, Massachusetts, New Hampshire, Ohio, South Carolina, Ver- mont, Virginia, Wisconsin. The following states had no antitrust laws: Colorado, Del- aware, Nevada, New Jersey (repealed 1920), Oregon, Pennsylvania, Rhode Island, West Virginia. Stigler, supra note 85, at 382.

94. Id. at 383.




tially to lessen competition, or to tend to create a monopoly."''95 Con- gress' 1914 statutes were thus

"written in the explicit language of 'competition.' . . . [Gone] was concern about industrial liberty and the rhetoric of 'small dealers and worthy men.' Gone was the explicit commitment to a political economy founded on tenets associated with a commonwealth of communities populated by an independent, roughly equal citizenry. In its place stood growing admiration for the genius of large-scale enterprise, appre- hension about the power of majoritarian government, and commitment to a federalist vision of free markets supervised by federal courts and agencies."96 Nevertheless, though federal law deferred less to regional pro-

ducer interests, federal politicians continued to pay homage to a producer-oriented vision of antitrust in their rhetoric. In approving the Clayton Act and the Federal Trade Commission Act, President Wil- son observed that their common purpose was "to make men in a small way of business as free to succeed as men in a big way." Likewise, the Robinson-Patman Act prohibited price discrimination "when its effect might be injurious to competition either between big and small buyers or between national and local sellers, in order further to preserve 'equality of opportunity' in the nation's markets."97 "Wil- son...stressed that 'independent enterprises still unabsorbed by the great economic combinations' predominated in the small Midwestern towns where he had been campaigning in 1912." Campaigning in a small Indiana town, "he claimed that about 85 percent of the industries there were 'locally owned and. .. controlled"' and "spoke of try- ing to maintain this pattern, even of enabling such towns to multiply, by preventing the 'concentration of industry. .. in such a shape and on such a scale that towns that own themselves will be impossible.'"98

The same geographical divisions that underlay the apparent ho- mogeneity of Congressional support for the Sherman Act were at work under Wilson. The east-west split was in part a rural-urban, big-small split, but it manifested itself even within similarly struc- tured sectors. For example, "city bankers in the Democratic south more readily accepted Wilsonian reform than did their northern - and largely Republican - counterparts; and urban businessmen in the West, where shippers predominated, fought their eastern col-

95. 15 U.S.C. S18 (1994). 96. Peritz, supra note 78, at 28. 97. Jerrold G. Van Cise, Antitrust past - present - future, in THE ANTITRUST IM-

PULSE: AN ECONOMIC, HISTORICAL AND LEGAL ANALYSIS VOL. I 24-25 (Theodore Kovaleff ed., 1994).

98. Alan Seltzer, Woodrow Wilson as 'Corporate Liberal': Toward a Reconsidera- tion of Left Revisionist Historiography, in THE MONOPOLY ISSUE AND ANTITRUST 1900- 1917 249 (Robert Himmelberg ed., 1994).




leagues who controlled the railroads."99 Local producer interests de- termined the health of the local economy. States whose local economies were jeopardized by national trusts drove the second wave of antitrust policy, even though this time around, the law was sufficiently nationally oriented to focus on consumer interests at the potential expense of regional producers.

The national character of antitrust policy would follow the na- tionalization of the economy and the federalization of politics. In the first wave of the New Deal, antitrust policy would try to achieve Eu- ropean-style "fair competition" with great "solicitude toward small businesses."100 ("Small" must have meant less efficient than the most efficient firm, but not so small as to be left out of the proposed cartels altogether.) Legislation in the second half of the New Deal (1935-38), however, "represent a sequence of efforts to resolve conflicts between large-scale enterprises and small business, conflicts ar- bitrated by invoking the interest of a 'neutral' third party - the consumer."'01 By establishing a federal administrative state capable of administering national antitrust policy, and ensuring a federal judiciary responsive to national economic interests, the New Deal set the foundations for a truly national merger policy. The rise of federal economic regulation, including a massive system of cross-state tax and transfer, has rendered consumer-oriented merger policy politically sustainable.

IV. GLOBAL COMPETITION POLICY

The development of competition policy in the United States and in the European Union suggests that merger regulation will not be oriented toward consumers at the expense of competing producers when producer-market integration and political integration lag far behind consumer-market integration. While an apparent global con- sensus in favor of consumer-market integration (i.e., free trade) spurs on the prospect of international antitrust law and enforcement, the fact that human factors of production are not as mobile as capital, and that nation-states have an unchallenged monopoly over macroeconomic policy - including taxation - will probably limit the political feasibility of a truly global competition policy.

The premise of an international competition policy is that free trade depends on it.102 Without common policy, or at least harmoni-

99. Robert Wiebe, Business Disunity and the Progressive Movement, 1901-1914, in Himmel, note 84, at 353.

100. Peritz, supra note 78, at 117. 101. Id. at 147. 102. In principle, free trade is so dependent on competition policy that competition

policy may already be within WTO jurisdiction. See Claus-Dieter Ehlermann and Lo- thar Ehring, WTO Dispute Settlement and Competition Law: Views from the Perspec- tive of the Appellate Body's Experience, 26 FORDHAM INT'L L.J. 1505, 1529-30 (2003)




zation, anticompetitive barriers could persist under lax enforcement regimes.103 At the same time, discriminatory enforcement could result in over-zealous interference with foreign mergers.104

Given the relationship between competition policy and trade goals, the WTO is naturally one of the proposed institutional homes of an international agreement on competition policy. But no political entity is now positioned to achieve the competition policy sought by proponents of free trade. Globalization of the consumer market could be advanced by coordinated or centralized competition policy, but further globalization of production is necessary before an 'international' competition policy is feasible.'05 If competition policy is coordinated, enforcement will continue in the hands of domestic regulators with strong incentives to favor domestic producers. If competition policy is centralized, the administering organization cannot hope to be more 'supranational' than the European Union; the WTO, at least, is 'openly' intergovernmental. The intergovernmental character of any enforcement body will result in a collective interest in a producer- oriented policy.

Of course, sheer political will - especially the will of powerful countries like the United States that may have the most to benefit from the ideal international competition policy - could in theory achieve what political economy makes unlikely. Mutual monitoring by governments in the free-trade context has arguably been a suc-

(arguing that Article 111:4 already applies to both competition laws and enforcement decisions, though application to individual decisions is the exception).

103. See Int'l Competition. Pol. Adv. Comm. to the Attorney General and Asst. At- torney General for Antitrust, U.S. Dep't of Justice, FINAL REPORT 201 (2000) ("As formal governmental barriers to international trade and investment are reduced or eliminated, international attention is turning more to anticompetitive practices occur- ring within nations that affect trade and investment flows from nations."). See also Daniel Tarullo, Norms and Institutions in Global Competition Policy, 94 AM. J. INT'L. L. 478, 483 (2000) ("Competition policy intersects with trade policy when anticompetitive conduct excludes a foreign company from a national market as effectively as a high tariff would, and when the competition authorities of the country have failed to provide a remedy for that conduct.").

104. Working Group on the Interaction between Trade and Competition Policy, CORE PRINCIPLES, INCLUDING TRANSPARENCY, NON-DISCRIMINATION AND PROCEDURAL FAIRNESS: BACKGROUND NOTE BY THE SECRETARIAT 21, WT/WGTCP/W/209 (Sept. 9, 2002) (global non-discrimination principles could mitigate local pressure to favor local producers, and reassure foreign investors); Working Group on the Interaction Be- tween Trade and Competition Policy, REPORT (2001) OF THE WORKING GROUP ON THE INTERACTION BETWEEN TRADE AND COMPETITION POLICY TO THE GENERAL COUNCIL 19, WT/WGTCP/5 (Oct. 8, 2001). See also John McGinnis, The Political Economy of Inter- national Antitrust Harmonization, 45 WM. & MARY L. REV. 549, 552 (2003) (Foreign bias in competition laws is likely to be come a greater problem as the WTO eliminates tariff and other barriers to trade in goods and services. The WTO should block substi- tution of discriminatory antirust law for barriers that it has removed in order to sus- tain progress in world trade.").

105. See Stephan, supra note 2, at 180-81 (noting that "[t]he protean nature of competition policy promotes administrative discretion and facilitates discrimination disguised by a veil of fact-specific, balancing-of-the-totality-of-circumstances analysis").




cess. But what has thus far proven politically impossible in the Euro- pean Union is probably not within the realm of possibilities for a looser international organization. First, the countries with the most to gain from a perfected international competition policy have the most to lose under an imperfect but empowered international regime; instead of facing individual countries attempting to restructure US mergers through the exercise of foreign jurisdiction, most of which do not have the clout of the European Union, US firms could face sys- tematically unfavorable rulings by an international body.

Second, the ultimate object of competition law, unlike the object of international free-trade agreements, is private merger agreements. While domestic competition authorities operate under certain published rules, enforcement decisions are highly fact-specific and often involve judicial adjudication. It would be difficult to challenge any given enforcement decision as contrary to international law, and this uncertainty compounds the limited incentive governments would have to initiate diplomatic process for a single transaction.

At the same time, states would find it difficult to challenge other states' competition policies in their entirety because they would have to contest a myriad of enforcement decisions, each with its own justi- fication. For these reasons, it would be more difficult to enforce a uniform standard of competition policy than to enforce free trade principles applicable directly to national laws. As a result, states are likely to shirk and promote producer interests in competition policy under an international regime until such time as the distribution of producer benefits, either in the first instance or after government tax and transfers, coincides roughly with the distribution of consumer benefits.

V. CONCLUSION

Explaining the producer-oriented focus of European merger regulations through the confederate structure of the European Union does not imply that such a federated structure is a prerequisite for producer-oriented economic policy. In fact, the EU approach to merger regulation is the norm. Pressure on antitrust authorities "typically does not come from consumer interests agitating for more imports, but comes from national producers agitating for pressure against foreign competitors."'06 US agencies often treat competitor complaints as a sign that the proposed merger is efficiency-enhancing but the United States is aberrant in this respect.107 It is only a pecu-

106. Lawrence Summers, Competition Law in the New Economy, 69 ANTITRUST L.J. 353, 357 (2001)

107. Baker, supra note 2, at 587. See also Int'l Competition. Pol. Adv. Comm., supra note 103, at 6 (urging competition agencies to avoid a "competitor-driven process").




liar economic and political structure that is hospitable to consumer- oriented merger regulation.

To be sure, federated states are the exception and most states are producer-oriented.108s My claim is not that EU merger law is producer-oriented simply because it is politically fractured while US merger regulation is consumer-oriented because it is essentially national. There exists no simple inverse correlation between the degree of consumer orientation and the devolution of political power. Al- though political and economic integration make a consumer orientation more likely, this is only true where antitrust law exists.

Federated states may be more likely to generate antitrust law in the first place. Until worldwide jurisdiction became feasible for very rich states, merger policy traditionally regulated only domestic mergers. While domestic mergers might hurt domestic consumer interests, local market dominance by local producers leaves no one with political voice to advocate for effective merger regulation in non-federated states. Economic law in countries without powerful, competing internal political jurisdictions will be driven by well-organized national producers, and they are the least likely to promote merger regulation.

If only federal states have long-standing antitrust laws, and if the politics of federalism produces competitor-focused merger law, then the pessimistic conclusion is that the only countries with consumer-oriented competition policy will be those that start out decen- tralized but centralize over time; or, at least, those countries where competition policy gradually moves into the hands of more nationally oriented policymakers, such as the executive and judicial branches.109 In the case of

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