AN ECONOMIC JUSTIFICATION FOR A PRICE STANDARD IN MERGER POLICY: THE MERGER OF SUPERIOR PROPANE AND ICG PROPANE
| Published date | 01 July 2004 |
| DOI | https://doi.org/10.1016/S0193-5895(04)21007-7 |
| Pages | 409-444 |
| Date | 01 July 2004 |
| Author | Richard O. Zerbe,Sunny Knott |
AN ECONOMIC JUSTIFICATION
FOR A PRICE STANDARD IN
MERGER POLICY: THE MERGER
OF SUPERIOR PROPANE AND
ICG PROPANE
Richard O. Zerbe Jr. and Sunny Knott
ABSTRACT
Mergerreview policy among countries varies according to the weight given to
consumers relative to producers. When both receive their full welfare weight
it is said that the efficiencies defense is fully realized. No well-developed
economic rationale has been given for giving more weight to consumers.
Such a rationale is given here by considering equity and efficiency both as
goods for which there is a willingness to pay.The willingness to pay approach
not only providesa rationale for giving consumers greater weight as with, e.g.
a price standard, but also shows how in principle the weight is to be derived.
The merger of Superior Propane and ICG Propane in Canada raises issues
of the tradeoff of equity and efficiency. The willingness to pay approach is
applied to this merger as an illustration.
Antitrust Law and Economics
Research in Law and Economics, Volume21, 409–444
© 2004 Published by Elsevier Ltd.
ISSN: 0193-5895/doi:10.1016/S0193-5895(04)21007-7
409
410 RICHARD O. ZERBE JR. AND SUNNY KNOTT
1. INTRODUCTION: EQUITY AND
EFFICIENCY IN MERGER POLICY
Merger control is the most common type of enforcement found among the ninety
or so jurisdictions of competition law.1The avowed purpose of merger review in
most countries is to protect the competitive market structure for the enhancement
of social welfare.2Countries differ on how best to do this. This conflict across
jurisdictions concerns how important consumer welfare is relative to society’s
welfare as a whole.
Economic efficiency as traditionally understood suggests that all individuals
should receive equal weight whether as consumers or producers. In merger law
this is done by allowing a fully realized efficiencies defense. A complete efficiency
defenseallowsgainstoproducerstooffsetlosses to consumers on a dollar for dollar
basis, and thereby provides a standard identical with economic efficiency.
Most countries stress the impact on consumers,3and so do not wholly adopt
economic efficiency as the standard. That is they apply lower weights to gains in
production efficiency when balancing them against consumer losses. Thus most
countries do not adopt a fully realized efficiencies defense. Merger laws break
down treatment of efficiencies into three basic approaches:4
(1) those that permit an efficiencies defense to overcome a charge of monopoliza-
tion or dominance (fully counted efficiencies);
(2) those that incorporate efficiencies in an overall competitive assessment (less
than fully counted); and
(3) those that take note of efficiencies as part of a public interest test (weight given
to efficiencies varies).
In the United States, the efficiency defense in merger cases is given little weight.5
Judges have historically interpreted the Sherman Antitrust Act Section 2 and
the Clayton Act Section 7 provision on mergers to require the prevention of
industrial concentration or monopolies that would harm consumers.6Consumer
welfare has taken priority over production efficiency. Analyzing legislative intent,
Robert Lande has argued powerfully that preventing unfair transfers of wealth
from consumers to monopolists was the overriding goal of the antitrust laws.
“Each antitrust law grew in part out of a desire to define and protect consumers’
property rights, an antipathy toward corporate aggregations of economic, social,
and political power, and a concern for small entrepreneurs” (Lande, 1982). The
historically pro-consumer, anti-monopoly orientation of U.S. antitrust policy is
reflected in the “Price Standard” of merger review, by which a merger will be
approved only if it does not result in materially increased prices. As a rough
An Economic Justification for a Price Standard in MergerPolicy 411
measure of the consumer impact of merger, a price increase as low as 1% might
be opposed if market concentrations exceed a certain level, regardless of the
efficiencies from the merger.7The Price Standard has been strongly defended for
administrative efficiency reasons as well as legislative intent.8
This emphasis in merger policy on consumer welfare in the United States and
elsewhere runs counter to the trend in antitrust policy,which has generally moved
instead towards emphasizing economic efficiency. In the United States this trend is
particularly evident in the antitrust revolution of the 1970s and 1980s. Economists
promoting an economic efficiency approach have argued that mergers should be
allowed when they create allocative, dynamic, transactional and production effi-
ciencies that contribute to the long-run welfare of society in spite of temporary
disturbances in price competition.9They havehad some success. Once condemned
as an offense,10 efficiencies havegained a limited salience for challenges to merger
injunctions, while the USDOJ Merger Guidelines have expanded the scope and
legal impact of cognizable efficiencies.
In some countries, policy favors economic efficiency. Australia, Canada and
Brazil come the closest to the efficiency standard.11 Canada recently moved much
closer to an efficiency standard as a result of a single contentious merger.Canadian
law uses a case-by-case balancing of efficiency and equity as a matter of law, but
this balancing may be trumped by an efficiencies defense. Under recent Canadian
law a merger will likely be approvedif it “is likely to bring about gains in efficiency
that will be greater than, and will offset, the effects of any prevention or lessening
of competition that will result.”12
In 1998, the initial decision of the Canadian Competition Bureau to challenge
the merger of Superior Propane and ICG Propane brought the conflict between
equity and efficiency rationales in merger control into high relief. Canada’s
only two major companies providing propane to end-users, ICG and Superior,
merged to produce substantial market power with a direct customer base of
low-income, rural, bottled propane users. When Canada’s Competition Tribunal
ruled in favor of the companies due to efficiencies created by the merger, the
Commissioner of Competition appealed the decision to the Federal Court of
Appeals on the grounds that equity effects were not given consideration in the
Sec. 96(1) analysis.
Using the facts in Commissioner v. Propane by way of illustration, this article
proposes an economic alternative to traditional efficiency analysis for judging the
desirability of mergers. We propose an efficiency approach to valuing equity that
can be applied to the wealth transfer effects of a merger. Though the calculation
of equity effects may be too difficult on a case-by-case approach, the general
consideration of equity effects provides a rationale for applying the Price Standard
to merger review.
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