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Does merger control work?

In late June, the chief executives of AT&T and DirecTV made their way to Capitol Hill to lobby on behalf of their proposed $48.5 billion merger. AT&T CEO Randall Stephenson claimed that the deal would lower consumer prices, telling members of the U.S. Senate Judiciary Committee in a hearing that “there will be downward pricing pressure in this industry as we become a more viable competitor.”

The public will find out whether his prediction comes to fruition early next year, when the Federal Communications Commission is expected to approve the transaction. But if the deleterious effects of past mergers are any indication, AT&T customers may soon be stuck in a lose-lose situation, either shelling out more money for cable TV and Internet service or paying a less pricy fee for an inferior product.

This is the concern of John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University. Over the past 40 years, Kwoka has written and consulted extensively on issues of market power, mergers, and merger remedies. In June, he received the 12th  annual Jerry S. Cohen Memorial Fund Writing Award for his paper on the efficacy of merger control.

The award, named in honor of the late trial lawyer and antitrust writer, is given annually to the authors of the best antitrust writing of the previous year. The winning selections, in the words of the award’s governing body, “reflect a concern for principles of economic justice and the dispersal of economic power.”

“This honor validates the research that I have been doing for a very long time,” said Kwoka, adding that policymakers and public interest groups have taken note of his latest work. “My hope is to strengthen merger enforcement policy by proving there are good grounds for taking a more skeptical approach toward mergers.”

Kwoka’s paper, published in 2013 in the Antitrust Law Journal, evaluated the accuracy and effectiveness of U.S. merger enforcement policy through a comprehensive analysis of merger retrospectives.

Specifically, Kwoka analyzed the details of more than 40 mergers with measured price outcomes, including 1999’s Exxon-Mobil merger and Whirlpool’s 2006’s acquisition of Maytag. He supplemented this data set with information pertaining to the actions taken by U.S. antitrust agencies with respect to those particular mergers—whether they were cleared, opposed, or approved with remedies.

The findings showed that about three-quarters of the carefully studied mergers resulted in price increases, with hospital and airline deals leading to 10 to 20 percent spikes. But what’s perhaps more surprising is that the price increases were considerably greater for mergers that were subjected to conduct remedies, policies designed by U.S. antitrust agencies to allow mergers to go forward with restrictions on their conduct. “Conduct remedies,” Kwoka said, “are virtually impossible to write and enforce in a way that would achieve the intended outcome.”

In his view, the costly effects of poor merger control touch the lives of nearly all Americans, the majority of whom have no choice but to deal with their financial implications. “Airfares are skyrocketing, planes are crowded, state attorneys general are swamped by hospital mergers,” said Kwoka, whose forthcoming book on U.S. mergers will be published by MIT Press in December. “The average citizen may not be able to take direct action, but researchers like myself can help by pulling the evidence together and getting the antitrust agencies to take note.”