The Political Economy of Federal Trade Commission

Administrative Decision Making in Merger Enforcement

by

Malcolm B. Coate and Andrew N. Kleit

WORKING PAPER NO. 210

November 1995

Coate: Federal Trade Commission

Kleit: Louisiana State University

We would like to thank William Shughart for helpful comments. The analysis and conclusions

presented herein are those of the authors, and do not purport to represent the views of the Commission

or of any individual Commissioner, or the official position of any Commission Bureau. A previous

version of this paper was presented at the January 1995 meetings of the American Economic

Association in Washington D. C.. Andrew Kleit would like to thank the LSU Faculty Summer Grant

Program for partial assistance.
1

I. INTRODUCTION

The Federal Trade Commission (FTC) is an administrative agency charged, along with the

Department of Justice (DOJ), with enforcing the antitrust laws. However, unlike the DOJ, the FTC

litigates the antitrust cases it chooses to prosecute, known as "administrative complaints", in front of its

own administrative law judges (ALJs), and then hears the appeal itself. While this process has raised

concerns in the past (Posner (1969), ABA (1989)), it has been subject to little empirical investigation. 

This study focuses on the formal decisions made by the FTC after an ALJ has conducted a full

trial on the merits for a particular case. The analysis explores a number of issues with a data set

generated by surveying all of the FTC's merger decisions from the 1950 reform of the Clayton Act to

1992. In particular, the structure of the FTC raises a number of interesting questions concerning how

the institution actually responds to various internal and external pressures.

Our study finds that while the merits of a particular matter affect the commission's decision,

internal political factors also matter. In particular, the number of commissioners who both vote to

prosecute and then vote as a judge in a case impacts on the FTC's decision, as well as the political

affiliation of the commissioners. Contrary to previous studies, however, we find little evidence of an

external political effect on FTC judicial decisions.

II. THE FTC'S ADMINISTRATIVE PROCESS

The FTC enforces the antitrust laws in partnership with the DOJ. Much of the antitrust

casework involves the evaluation of the competitive effects of proposed and consummated mergers. 

Decisions are made by a majority vote of the five Commissioners, in response to staff recommendations

on particular cases. Commissioners are appointed by the President and confirmed by the Senate for

terms of up to seven years.
 

1

 Under the 1976 Hart-Scott-Rodino (HSR) Act, the FTC can also interdict a proposed merger by

obtaining a preliminary injunction from a federal district court, with possible review from the relevant

court of appeals. If the court declines to issue the injunction, the firms are free to merge, subject to the

administrative process described here. Between October 1983 and September 1992, the FTC voted

to challenge 75 horizontal mergers filed under Hart-Scott-Rodino. The Commission litigated 13 of

these cases in federal court, winning ten injunctions. Administrative complaints coincided with the

injunctions, although most of the defendants settled and abandoned their transactions. In the five cases

that went to trial, the Commission dismissed one, ordered a divestiture in another and settled a third

after a Commission decision on the merits. One is currently on appeal although the acquisition

collapsed years ago and the last is at the Commission for a decision. Thus, only one or at most two of

the 75 transactions will have survived the FTC process under the HSR Act.

 

2

 The DOJ uses the federal court system for merger law enforcement. While a preliminary

injunction trial would be similar to one litigated by the FTC, the DOJ also can litigate cases against

consummated mergers in a full trial on the merits. In recent years, however, the DOJ has started

litigating combined preliminary injunction/full trials on the merits. This approach allows the court system

to rule on the legality of a merger in a one step process. 

 

3

 We note that it has now been over twenty years since the Supreme Court decided a merger case

on the merits, U.S. vs. General Dynamics 415 U.S. 486 (1974). 

2

If the merging firms choose to oppose an FTC enforcement action, the agency initiates a lengthy

court process to attempt to obtain a permanent injunction against the merger.1 After presiding at a trial

on the merits, the ALJ issues an initial decision and an order to remedy any identified problems. This

decision and any ensuing order may be appealed to the Commission by either the respondents or the

FTC staff. The Commission then issues a "formal" decision on the merits, along with an order to

resolve the competitive concern. The FTC decision can incorporate a complete review of the trial

record, and is not constrained in any way by the findings of the ALJ.2 If the Commission finds a

violation, the respondents may appeal to a federal appeals court and, ultimately to the Supreme Court

before an order is actually enforced.3

In effect, the administrative FTC is transformed into a federal court for the purpose of ruling on

a merger. Along the lines of Cohen (1991), we expect that, in making these decisions, FTC

commissioners can be modeled as utility-maximizers. We hypothesize that FTC administrative decision

making on mergers is driven by three different types of factors. The first set of factors is the actual

merits of a particular matter. Given the possibility of appeal, and that a reversal on appeal would

diminish the reputation of commissioners, the stronger the merits of a case, the more likely the FTC is to
 

4

 The 1989 American Bar Association (ABA) committee report on the Federal Trade Commission

noted "no thoughtful observer is entirely comfortable with the FTC's (or other agencies')

 combining the prosecutory and adjudicatory functions. Whenever the same people who issued a

complaint later decide whether it should be dismissed, concern about at least the appearance of fairness

is inevitable (ABA 1989 at 35)". However, only a minority of the ABA committee recommended

reform to separate the functions.

3

rule favorably for itself and against the relevant firms in a particular matter. We expect horizontal

merger cases to be stronger than vertical or potential competition cases, holding other structural factors

constant. It is also possible that the FTC's merger enforcement standards have changed over time, with

more recent cases less likely to lead to merger orders, again holding other considerations constant. In

particular, the Supreme Court's 1974 General Dynamics decision may have had an effect on the

process, because the court ruled that merger decisions must look beyond market concentration and into

other competitive aspects of a merger case. 

The second factor is how a case fits into the internal political structure at the FTC. This could

be especially important given the process by which FTC complaints are decided. Complaints are first

voted out by FTC commissioners and are then sent for trial before an ALJ, who is also an FTC

employee. Once the ALJ makes his decision, the case is appealed back to the Commission, a

commission often consisting of some of the same people who issued the complaint in the first place. 

Thus, unlike most of the American legal system, an FTC commissioner can be both the prosecutor and

the judge on a particular case.4 Utility-maximizing commissioners may well be reluctant to publicly

admit they were mistaken in prosecuting a particular matter. We hypothesize that the more

commissioners voting on a formal decision who were also part of the decision to prosecute that matter,

the more likely it is that the FTC will find in favor of its own case.

The Commissioners' political affiliations may also influence their decisions, with Republican

commissioners hypothesized to be less likely to support cases than Democratic commissioners, all else

equal. This hypothesis questions the "public interest" model of antitrust, because it claims politics affects

antitrust decisions. However, if one admits to different interpretations of the "public interest", one can

argue that Democratic and Republican commissioners are simply voting ideologically different
 

5

 Contrast this observation with the work linking enforcement decisions to politics during the

Reagan/Bush commission (see Coate, Higgins and McChesney, 1990). While the political composition

of the Commission varied significantly from 1956 to 1988, the political composition of the Reagan/Bush

commission changed little. Thus, changes in enforcement intensity linked to exogenous political

variables is more difficult to explain away as a difference of opinion.

 

6

 These examples are for illustrative purposes; any difference in interpretation of the goals of antitrust

would generate hypothesized results.

4

interpretations of the public interest.5 For example, a disagreement over the goals of antitrust would

generate different voting patterns. Republicans could support an economic efficiency standard which

would allow for limited enforcement, while Democrats could support a consumers' surplus standard

which would lead to more aggressive enforcement.6 The political variable could be driven either by the

nominal party affiliation of the Commissioner or the party of the President making the appointment. It

may be possible to determine if the FTC Act has been successful in achieving a "balanced" commission

with Republican Presidents actually appointing "true" Democrats and Democratic Presidents appointing

"true" Republicans.

The third factor that could affect FTC decisions is outside political influence. The FTC is an

administrative agency funded by Congress, and thus may be affected by the make-up of its oversight

bodies. Standard public choice theory, along the lines of Weingast and Moran (1983), indicates that

the Commission will be reluctant to offend Congress because doing so could reduce the FTC's funding. 

We expect that the more "liberal" the various Congressional bodies are, the more likely the commission

will be to find an antitrust violation in order to protect commission financing. Also, it may be that if

larger firms have political influence, the FTC could be less likely to rule against such firms.

Politics could also enter the analysis more directly. The FTC could be less likely to find against

firms if such firms are located in the district of a Congressman or Senator serving on an FTC oversight

committee or subcommittee. Previously, Faith, Leavens, and Tollison (1982) found support for a "pork

barrel" hypothesis through analyzing the correlation between FTC decisions and membership on FTC

oversight committees. This paper will test the "pork barrel" hypothesis by looking for a relationship

between the identity of the members on the various oversight committees and the outcome of the case.
 

7

 Of the seven excluded merger cases, five were horizontal mergers, one was a vertical transaction

and one was a potential competition matter. The four industry cases involved both horizontal and

potential competition issues. Complaints issued after 1988 are generally still working their way through

the legal system. 

 

8

 In most cases, either the shares of the top 8 firms were recorded or four and eight firm

concentration ratios were given along with a few actual share figures. In this case, the missing share

figures would be estimated from the concentration data. While complete universe of data was not

available, fringe shares were estimated from the residual. Given the Herfindahl is driven by the large

share firms, only minimal error should be introduced. For nine cases, the Herfindahl was estimated

from the four-firm concentration ratio using a mapping defined by the Coate, Higgins and McChesney

(1990) data set. Finally, in four industries, the decisions noted the government failed to prove a market

and no Herfindahl finding was made. These missing values were assigned the value 1000 (along the

lines of the DOJ 1992 (and 1982) Guidelines' "unconcentrated" threshold) to indicate an

unconcentrated market.

5

III. OVERVIEW OF THE DATA

A. Relevant Variables

The data set was constructed by reviewing all mergers challenged by the FTC from 1950 to

1988 and decided between 1956 and 1992. After excluding three mergers because the relevant

acquisition was a small part of a broad antitrust case, four mergers because the challenged transactions

were designed to restructure an industry, three mergers because the staff withdrew their challenge

during the litigation and one merger case because it was closed on non-economic grounds, we were left

with a sample of 70 mergers. Of the 70 cases, 44 were horizontal, 12 were vertical and 14 dealt with

potential competition theories.7

All of these transactions went through the same basic process. The Commission initiated action

challenging the various transactions by issuing a formal complaint, a trial was held and an ALJ decision

issued, usually a couple of years after the formal complaint. Then the case was argued before the

Commission and an official decision was issued. 

With respect to the economic merits of a particular matter, the FTC decisions contained

information on the key economic issues of concentration and entry barriers. We used the Herfindahl

index (Herfindahl) as the relevant measure of concentration. This figure was taken directly from the

recent decisions and calculated from market share information for old decisions.8 The decisions also
 

9

 Evidence on competitive conditions and efficiencies were noted in recent cases, but were often

omitted entirely in the older cases. Thus, no attempt was made to collect this data.

6

included barrier-to-entry findings (Barriers) usually in the FTC decision, though a few cases contained

only barrier information in the ALJ decision. In recent cases, the finding was highlighted as an explicit

part of the analysis, while in older cases, the information tended to be mentioned as an aside. As a

check on this variable, the authors reviewed the specific industries involved in the transactions. While a

few of the barrier determinations appeared incorrect (i.e. most observers would likely considered entry

easy into the florist foil market in the 1990's), the great majority of the determinations appeared valid

under Merger Guideline principles elucidated during the 1980's.) Of course, disputes would remain,

with some believing entry to be easy in retailing, various brand name consumer products and

distribution, while others would offer more sophisticated explanations for why entry would be deterred. 

Although the historical decisions tend to resolve disputes with a finding of entry barriers, no clear shift in

policy was identified.9 In our model, the merits of a merger case depend on both the level of the

Herfindahl and the presence of barriers to entry. As the Herfindahl increases, we expect the

Commission to be more likely to find a violation. Likewise, the Commission would be more likely to

enjoin a transaction if barriers to entry existed. 

We also computed a time trend variable, defined in months and starting from January 1956, the

year of the first FTC decision in our data series. The April 1974 date of the General Dynamics

decision is of particular interest, because this Supreme Court decision increased the burden on the

government in merger cases. An interaction of the time trend with a dummy variable associated with

the date of the General Dynamics decision would take on a negative sign if merger standards tended

to be gradually relaxed following the Supreme Court's decision. 

Throughout the period in question, not only did the Commission deal with pure horizontal

mergers, but it also dealt with vertical mergers and mergers dealing with issues of potential competition. 

To account for these different types of cases, we defined a variable equal to 1 if the matter involves a

vertical acquisition, and zero otherwise, and a variable equal to 1 if the matter deals with potential
 

10 Another interpretation of such a result is that both prosecutions and final orders may in part

represent idiosyncrasies of particular commissioners. If this were the case, the FTC administrative

process could be seen as not have the normal checks against idiosyncracies of a standard court system. 

 

11 The political index for the Commissioners issuing a decision was based on the Commissioners

participating in the matter.

 

12 Independent Commissioners are assigned to the party with the minority at the Commission. One

"independent" Commission Elizabeth Hanford is considered to have switched parties, counting initially

as a Democrat (to avoid a Republican share of 80 percent) and then as a Republican (to avoid a

Democratic share of 80 percent). She married Republican Senator Robert Dole while on the

Commission.

7

competition, and zero otherwise. Given these cases are generally considered less threatening to

competition than horizontal mergers (holding the structure variable constant), we expect a negative sign

for both variables.

For internal political factors, background information on the FTC was also collected. First, the

initial complaint and the final decision, are linked with an index OLD for the number of Commissioners

that both served on the Commission when the complaint was issued and subsequently voted on the final

decision. This index ranges from 0 to 5. Consistent with Posner (1969), we expect that the number of

OLD commissioners deciding a matter will have a systematic positive effect on the Commission's final

decision. We expect that Commissioners who voted to prosecute a particular matter will be, on

average, reluctant to admit, by finding for the parties in that matter, that the decision to prosecute could

have been a mistake.10

To obtain some understanding of the partisan political influences inside the Commission, two

political variables were computed at the time of the official decision.11 The first variable (Republican)

estimates the average political affiliation of the Commission, with the value 1 assigned to each

Republican Commissioner and the value zero to each Democratic Commissioner voting in the

decision.12 Although the Commission is only allowed to have three members from a party, the fact that

some Commission seats temporarily become empty and that some Commissioners do not participate in

particular manners allows the index to exhibit a somewhat wider range (from 0.25 to 0.75 in the

sample). A second index (President) considers a commissioner to be associated with the party of the
8

President that made that Commissioner's initial appointment. We set this variable equal to the

percentage of the Commission appointed by a Republican president. This variable ranges from 0 in the

mid 1960's to 1 in the late 1980's. If Republican commissioners are less likely to support merger

regulation, a negative sign would be observed for at least one of the variables. In theory, if the

President is able to appoint individuals sympathetic to the position of his party, independent of a

commissioner's formal affiliation, the variable for the party of the appointing President will be more

significant, while if the appointed commissioners are more likely to represent party positions at the

Commission, the official party affiliation variable will be more important. 

For external political factors, consistent with much previous literature (for example, Weingast

and Moran, 1983), we use the "liberal quotient", as measured by the group Americans for Democratic

Action (ADA), for the FTC congressional oversight committees, subcommittees, subcommittee

chairmen, as well as for Congress as a whole. We expect that the more liberal the median member of

the relevant House and Senate oversight bodies are, the more likely the commission is to take an

activist role and find for itself in a particular matter. However, we do not know if the influence resides

at the full house level or is generated in the committee system. To test for various possibilities, we use,

along the lines of Spiller and Gely (1992), ratings at four levels: subcommittee chairman, subcommittee,

committee, and the full house.

We also hypothesize that the size of the respondent firms matters. It is possible that large firms

may bring more political pressure to bear on the FTC to rule in their favor. Another way of interpreting

such an effect, as McChesney (1991) suggests, is that decisions in favor of large firms may represent

rent-extraction on the part of the FTC. On the other hand, large firms may be targets for "populist"

antitrust and thus be more likely to lose. Two measures of size, the sales of the acquiring firm and the

value of the transaction were considered. Most of the cases contained information on both the dollar

value of the merger transaction and the sales of the acquiring firm. If the value was not reported, the

Wall Street Journal index was used to search for the actual value. Likewise, if the sales of the acquiring

firm were missing, various corporate indexes were consulted. The values were transformed to real
 

13 On occasion, the transactions involved competitive concerns in more than one market (10 cases)

or involved more than one challenged deal (12 cases). For those cases involving more than one

market, the economic data were collected for the most serious overlap, while for cases involving more

than one deal, the economic variables implicitly proxy a combined transaction. Likewise, the value of

the deal represented the sum of all the transaction prices. 

 

14 Data at the committee chairman level was not used, because few firms would be represented by

a chairman and data for the entire house or senate was not used, because almost all firms are

represented by a congressman or senator (foreign firms would not represented by anyone.)

9

prices with the GNP price deflator.13 Logarithmic transformations were also considered to allow for a

declining effect associated with increases in size.

Finally, we test to see if the pork barrel hypothesis applies to FTC decisions. We gathered

data on the jurisdictions of the members of the FTC's House and Senate oversight committees and the

location of the headquarters office of the various acquiring firms in the sample. A match was assumed

for any Congressman or Senator representing the state in which the firm had its headquarters. 

Variables were calculated for both the subcommittee and full committee in both the House and Senate. 

In addition to reviewing the effects of each committee, one could add the representation at either the

subcommittee or committee for both the House and the Senate to get an average measure of the "pork

barrel" effect.14 If the Commission responded to these "pork barrel" concerns a positive effect would

be observed.

B. Summary of the Data

To set a background for the analysis, we present a brief overview of the data. Summary

information on win rates organized by the merits variables is presented first, followed by an initial

analysis of the relationships between case outcomes and the internal political factors. The section

concludes with a look at the relationship between win rates and the external political considerations.

Table 1 presents the FTC win rate for the three types of cases (horizontal, vertical and potential

competition) and three classifications of the competitive merits. Data are presented for both the preGeneral Dynamics and the post-General Dynamics periods, with cells based on fewer than five cases

marked with an asterisk. Win rates are lowest for potential competition cases and (surprisingly) highest
 

15 Information is also available for the relationship between the ALJ and final FTC decision. In

general, the Commission upholds the ALJ decision (36 of 50 orders and 13 of 20 dismissals.) 

However, the Commission reversed the ALJ decision in thirty percent of the cases, with liability found

in two-thirds of these decisions. 

 

16 The Clinton administration obtained effective control of the FTC in early 1995, two years into the

Presidential term. However, this delay appears linked to an unusual pattern in the expiration of the

Commissioners' terms and the lack of any Commission resignations.

10

for vertical mergers. However, few vertical cases are included in the post-General Dynamics data, so

no strong conclusions should be drawn. The link between merits and success is clear. In the three

categories of cases, evidence on barriers to entry improves the likelihood of an injunction, and evidence

of high concentration (greater than 2000) usually enhances the chance of success. Overall, the initial

review of the data is compatible with our hypotheses that high barriers and Herfindahl findings are likely

to lead to an injunction, and that potential competition cases are more likely to lead to dismissal, but

casts a little doubt on the expectation for vertical cases.

It is possible to search for a relationship between either the number of "OLD" commissioners or

the political affiliation of the Commissioners and the likelihood of a Commission merger order.15 To

start the analysis, cases are organized into five classifications, one for each of the last five Presidential

eras. Given continuity of policy as Vice-Presidents replace Presidents, the length of the periods range

from four years in the Carter administration to twelve years for the Reagan administration. These

periods are defined by the time the President's party obtains control of the FTC, generally a year after

the Presidential Inauguration, until the time the President's party loses control of the agency, again a

year after the Inauguration.16 Although the exact date associated with the switch in control is difficult to

identify, very few cases are decided during a change in administrations.

Table 2 presents a summary of winning percentages classified by Presidential era and number

of "OLD" commissioners. A number of observations can be made with the data. First, only one

Reagan and no Carter era decisions involve three or more Commissioners that served when the case

was initiated. This suggests either more Commission turnover or longer trial and appeal times. Second,

the sample averages tend to suggest that the FTC was highly prone to find for itself until the Carter era. 
11

Finally, the overall win rate appears to increase with the number of "OLD" commissioners. If one or

two commissioners served on the prosecuting commission, the win rate averages around 60 percent. 

On the other hand, if three or more Commissioners served on the prosecuting commission, the win rate

exceeds 90 percent.

A similar analysis can be undertaken for the political orientation of the Commission. Table 3

illustrates the winning percentage by Presidential era and percentage of Republicans on the deciding

panel. While it is difficult to see any political effect in the Eisenhower, Kennedy, Nixon and Carter

eras, the Reagan cases seem to show a decline in the likelihood of an order as the number of

Republicans on the Commission increases. Moreover, the same general pattern appears to emerge in

the overall data.

FTC winning percentages can also be organized by the political control of Congress. Table 4 is

based on congressional data on various Senate and House oversight bodies organized into four

categories. A congressional entity is considered conservative if the median ADA rating is less than 40,

moderately conservative if the ADA rating is between 40 and 50, moderately liberal if the ADA rating

is between 50 and 60 and liberal if the ADA rating is over 60. Senate and House ADA data for four

classifications, the entire chamber, the committee, the subcommittee and the subcommittee chairman are

used in the analysis. Average winning percentages for FTC cases are computed for each cell in the

table, with percentages based on fewer than five observations marked with an asterisk. Abstracting

from the small sample cases, the Senate data generally shows the expected rise in success rates with the

ADA rating. This effect is more noticeable for the various committee and subcommittee levels, and

significantly less obvious at the full senate level. The House results are much more confusing, with no

clear pattern emerging. This may be caused by the fact that 89 percent of the cases were decided

under oversight from liberal (as defined above) subcommittee chairmen. If these individuals had the

relevant political power, then there may not be enough variance in the data to identify any effect. 

Overall, while it is likely any Senate effect can be identified, a House effect may not be observed in the

data.
12

A final test would replicate the Faith, Leavens and Tollison test. The winning percentage of the

firms with "representation" in Congressional committees was actually lower than the winning percentage

of the control group (although the result was only significant for the Senate subcommittee). Thus, the

initial review of the data does not support the pork barrel hypothesis.

In general, the initial analyses of the data are suggestive of a number of our hypothesized

findings, but more detailed analyses is necessary before any strong conclusions are drawn. Thus, we

turn to an econometric model of FTC decision making to investigate the various findings. 

IV. ESTIMATION RESULTS

A statistical model will be presented here to attempt to explain the Commission's win rate as a

function of the various independent variables. Since the FTC can either rule for or against itself on a

particular case, the relevant dependent variable will be binomial, that is, either 0 or 1. Therefore, a

limited dependent variable estimator such as the probit is an appropriate procedure for this econometric

question. We analyze the data in two steps. First, we estimate probit coefficients for the merits and

internal political variables and then we estimate a larger model that adds external political variables. 

To set the background for the probit analyses, Table 5 calculates means for all the relevant

variables for the period 1950-1974 (the pre-General Dynamics era), 1974-1992 (the post-General

Dynamics era) and the entire sample. Although some differences were observed, a number of other

variables were almost identical over the entire period.

The average Herfindahl was generally the same over the entire period, a result which was also

observed when the sample is limited to horizontal mergers. Barriers to entry were found in roughly 70

percent of the cases in each subperiod. More recent cases appear to have shifted away from vertical

mergers, with the percentage of vertical challenges significantly lower in the post-General Dynamics

period. 

The internal political variables show the same mixed results. Early cases were heard by an

average of 2.19 "OLD" commissioners, while relatively recent cases had a significantly smaller average
 

17 While the limited data preclude an exact test, the explanatory power of the time trend model

exceeds that of a model incorporating only a dummy variable for the 1974 General Dynamics

decision.

13

of 1.56. On the other hand, the variable proxying the average political affiliation of the commissioners,

Republican, remained largely the same over the two eras. The other political variable, defined by the

party of the President that appointed the commissioners, identified a significant swing towards the

Republican party which matches the change in White House control over the two eras. 

Overall, the cases tend to involve both larger firms and transactions after 1974, with the

difference significant for both sales of the acquiring firm and the value of the transaction. Also, the

Congressional variables picked up the change in political control representative of the overall data. 

While the relevant Senate variables tended to become more conservative (lower ADA ranking), the

House appeared more liberal, especially at the oversight committee. Finally, the pork variables

identified the fact that acquiring firms tended to be more likely to have representation on oversight

subcommittees before the General Dyanamics decision than after. This result did not occur for the

overall committee and probably adds little to the analysis.

 Three sets of probit coefficients are estimated in Table 6, the first of which considers the merits

variables, the second which adds a number of internal political factors, and a third which uses a

narrower set of internal political factors. The merits and internal factors are generally significant,

regardless of the specification of the model.

The first column of results in Table 6 reports the relevant coefficients for a pure "merits" model. 

We find that the coefficients on the two merits variables, Herfindahl and Barriers, have the expected

signs and the barrier variable is clearly significant. Other coefficients suggest that potential competition

cases face higher standards than the horizontal cases, while the standards for vertical cases do not

appear to be different from the horizontal cases. The results also indicate that the Commission

standards were relaxed after the General Dynamics decision.17
 

18 The significance of both variables increases dramatically if date is deleted from the model. 

 

19 The President variable is not significant if the Republican variable is omitted from the model to

minimize the potential for multicollinearity.

 

20 An alternative explanation is that individuals appointed to the Commission vote to please their

party to assure consideration for future jobs once their current term expires. In effect, the views of the

appointee change once appointed to the Commission.

14

The second column highlights the results of a broad "merits and internal politics" model. Of

perhaps greatest interest is the coefficient for the number of "OLD" Commissioners. The positive sign

of this variable indicates that commissioners are more likely to vote for administrative complaints if they

were members of the commission that chose to prosecute those cases. Thus, it appears to matter if

Commissioners act as both prosecutors and judges.

The coefficient on the party affiliation variable, Republican, has the expected sign and is

statistically significant, indicating that the political composition of the commission impacts on merger

decisions.18 In particular, as Republicans replace Democrats, the commission becomes relatively less

likely to enjoin a transaction. The coefficient on the variable for the political party appointing the

Commissioner, President, however, is insignificant (and takes on an opposite sign than what was

expected.) Therefore, the party of the President making the appointment does not appear to be

relevant.19 Given the FTC Act prevents one party from obtaining more than three seats on the

Commission, it is possible that the Senate's confirmation process precludes the President from

appointing members from the opposition party that are too far out of step with the opposition party's

mainstream viewpoint. Thus, for example, Democrats appointed by a Republican president would tend

to vote like Democrats.20 

We reestimated the model without the weak political variable (President) and the results are

reported in the third column. While the explanatory power of the model falls slightly, the similarity of

the coefficients suggests the basic results are robust to the exact specification of the model. 

External political variables for firm size and congressional ideology are added to the final model

of Column 3 (Table 6) to generate the results in Table 7. Four formulations of the case-specific
 

21 The coefficient does reach a standard significance level in three of the 16 runs. Moreover, the

significance of the coefficient improves for other specifications of the model.

 

22 Significant results tend to be obtained for the Senate subcommittee and subcommittee chairman if

the time shift parameter is removed from the model. This choice would appear inappropriate, because

the shift is necessary to account for a change in legal standards. The significant Senate result may be

caused by a contemporaneous conservative shift in the Senate oversight subcommittee in the mid

1970's.

15

political variable are matched with four formulations of the Congressional variables to check for the

robustness of the results. In particular, both the real value of the acquiring party's sales and the real

value of the transaction (in either dollars or logarithmic form) are considered as measuring general

political effects. Likewise, the Congressional control variables are measured at the entire house, the

committee, the subcommittee and subcommittee chairman level as noted in the table. While this

approach generates a total of 16 possibilities, a representative four are presented for analysis. 

Overall, the merits variables (Herfindahl and Barriers) retain their explanatory power when the

model is generalized to consider external political forces. Potential competition cases remain statistically

less likely than horizontal cases to result in Commission orders and vertical cases appear less likely in

one of the four models. Overall, the merits still matter in the presence of exogenous political variables.

The internal political variables also appear to retain significance, although the conclusion is not

as strong. One formulation of the exogenous political variables eliminates the significance of the "OLD"

commissioners and another the significance of politics. Moreover, the coefficient for OLD

commissioners is only marginally significant in the other regressions.21

Interesting, few of the political variables show any statistical significance. The transactionrelated variables (price and sales) tended to reduce the likelihood of a merger order, but were

insignificant. Moreover, of all the formulations of the congressional variables, only the House

subcommittee chairman has a clear effect on the decision process and the sign is negative, indicating a

more liberal chairman reduces the likelihood of a Commission order. It is difficult to place much

credence in this result.22
 

23 If one introduces a shift variable to allow the coefficient on the Senate and House variables to

change after the General Dynamics decision, one finds a significant positive effect on the Senate and

subcommittee ADA rating and a significant negative effect on the House and subcommittee rating for

the post 1974 period. These results cannot be replicated with the post-1974 sample.

16

This outline is slightly surprising given our tabulations and the previous research showing a

relationship between Congressional control and FTC decisions. One possibility is the addition of the

internal political variables to the model capture political effects linked to Congressional factors. 

Another possibility is the longer time period (1956-1992) obscures a Congressional power that ebbs

and flows between the Senate and the House and among the various committee groups. While focusing

on smaller periods of time could minimize this problem, it would create another problem associated with

small samples.23 

Table 8 reports our test of the pork barrel hypothesis. The first model of Table 8 uses the

number of relevant congressmen and senators on the FTC's oversight subcommittee, while the second

model uses the number on the oversight committee. The pork barrel coefficient is not significant in

either of these specifications, nor in any of the several other specifications we attempted. This result

suggests the earlier support for the pork barrel hypthesis cannot be replicated in a more general model

over a broader time period. Again while smaller time periods could be studied, the lack of data makes

this approach difficult.

The merits-internal political model in Column 3 of Table 6 appears to be the most appropriate

equation for predicting Commission decisions. For a horizontal merger case, with the "OLD"

commissioners and Republican variables at their means and the time index set to June 1995, we find the

presence of barriers can raise the probability of an order from 5 percent to 87 percent for a Herfindahl

of 3000. Changes in the Herfindahl have smaller effects, with a Herfindahl of 2000 associated with a

75 percent change of an order and a Herfindahl of 4000 linked to a 95 percent chance of an order.

Internal political variables also have an impact on the outcome of the case. For a horizontal

decision in June 1995 that finds barriers to entry and a Herfindahl of 2000, the probability of an order

can range from 24 percent for a Commission controlled by Republicans and no "OLD" commissioners
17

to 96 percent for a Commission dominated by Democrats and three old Commissioners. However,

these bounds are somewhat unrealistic, because a Commission in transition from one party to the other

is unlikely to have many "OLD" commissioners. Given the remaining terms of actual Commissioners, it

is likely to be dominated by Democrats, but with one or two "OLD" commissioners. This would

suggest a probability of a Commission order against the merger under discussion of between 78 and 90

percent. Overall, the model suggests that both the merits and internal politics are extremely important in

the outcome of merger cases.

V. CONCLUSION

Our review of FTC administrative decision making generate a number of interesting initial

conclusions. The mix of cases appears to have changed over time, with a movement away from vertical

and potential competition mergers. Winning percentages were initially high, but fell in the 1970

Econometrics results indicate that both the economic merits and internal political factors affect

Commission merger decisions. In particular, the ability of commissioners to act as both prosecutor and

judge on a particular matter can significantly increase the likelihood of a merger order. Likewise, a

Republican-dominated Commission appears less likely to oppose a transaction. Somewhat

surprisingly, however, we were unable to find on impact of external political factors on the FTC's

decisions. 

While the statistical significance of the number of "OLD" Commissioners suggests an internal

political problem with the administrative process, the political variables clearly suggest that the FTC Act

has been successful in achieving some political balance at the Commission. Abstracting from

personalities, Democratic (Republican) appointees of Republican (Democratic) Presidents tend to vote

similar to Democratic (Republican) appointees of Democratic (Republican) Presidents. In contrast to

previous studies, however, external political orientations or pork barrel considerations do not appear to

significantly influence judicial decisions of the FTC. 
18

Table 1

FTC Win Rates by Type of Case and Merits

(before and after General Dynamics' Decision) 

1950 - 74 1974 - 92 Total Cases

Horizontal 44

 0 75 29 53 15

 1 - 2000 100 64 75 16

 2000+ 100 83 92 13

 Average 90 58 73

 Vertical 12

 0 0* - 0* 2

 1 - 2000 100* 100* 100 5

 2000+ 100* 100* 100 5

 Average 80 100* 83

 Potential 14

 0 0* 0* 0* 4

 1 - 2000 100* 50* 67* 3

 2000+ 100* 67* 86 7

 Average 83 38 57

*Less than 5 cases in a cell
19

Table 2

Winning Percentages by Number of "Old" Commissioners

Number of "Old" Commissioners

FTC Era 0 1 2 3 4 5 Mean

Ike 100 100 100 100 100 - 100

Kennedy 100 57 - 100 100 100 84

Nixon - 67 80 86 100 - 80

Carter - 75 50 - - - 63 

Reagan 0 50 37.5 0 - - 38

Overall 83 63 58 87 100 100 71

Cases 6 24 19 15 5 1

FTC Eras 

Ike 1954 - 1961

Kennedy 1962 - 1969

Nixon 1970 - 1977

Carter 1978 - 1981

Reagan 1982 - 1992
20

Table 3

Winning Percentage by Average Political Affiliation of Commission

Percentage of Republicans

FTC Era .25 .33 .40 .50 .60 .67 .75 Mean

Ike - - 100 100 100 - 100 100

Kennedy - 100 67 100 - 100 - 84

Nixon - 100 100 80 75 100 - 80

Carter 67 - 33 100 - - - 63

Reagan - - - 50 29 50 33 38

Overall 67 100 64 88 64 67 50 71

Cases 3 4 14 17 22 6 4
21

Table 4

Winning Percentages by Type of Political Control

 Senate Committee Subcommittee Chairman

Conservative 64 59 45 41

Moderate - C 73 70 73 100*

Moderate - L 75 75 58 88

Liberal 50* 100 92 79

House Committee Subcommittee Chairman

Conservative 75 78 77 100*

Moderate - C 85 71 83 100*

Moderate - L 55 71 58 100*

Liberal - 33 65 68

* Less than 5 cases in class

Conservative ADA < 40

Moderate - C 40 < ADA < 50

Moderate - L 50 < ADA < 60

Liberal 60 < ADA

 

ADA - Americans for Democratic Action Congressional Vote Rating
22

Table 5

Means of the Variables

1950 - 1974 1974 - 1992 Total

Merit Variables

Herfindahl 2622 2216 2425

Barriers .69 .71 .70

Vertical .28 .06* .17

Pot. Comp. .17 .24 .20

Internal Politics

Old Comm. 2.19 1.56* 1.89

Republican .51 .53 .52

President .33 .63* .48

External Politics

Sales 1.83 2.98* 2.39

Price 3.41 4.46* 3.92

Senate (ADA) 49.2 46.6 48.0

Committee 52.0 40.9* 46.6

Subcommittee 60.3 43.0* 51.9

Chairman 77.4 41.0* 59.7

House (ADA) 40.3 44.3* 42.2

Committee 29.6 51.9* 40.5

Subcommittee 47.6 47.8 47.7

Chairman 85.5 70.3* 78.1

Subcommittee Pork .78 .44* .61

Committee Pork 2.30 2.24 2.27

* The difference between the two periods is significant.
23

Table 6

Regression Results - Merits and Internal Politics Models

(t-statistics in parentheses)

Variable Merits Model Merits &

Internal Model (I)

Merits &

Internal Model (II)

Constant 0.771

(0.14)

1.02

(0.85)

0.944

(.80)

Herfindahl 0.000285

(1.51)

.000499

(1.88)

.000479

(1.83)

Barriers 2.20

(3.82)

2.78

(3.66)

2.81

(3.74)

Vertical -.815

(-1.17)

-0.841

(-1.10)

-0.884

(-1.17)

Pot. Comp. -1.13

(-1.85)

-1.44

(-1.80)

-1.47

(-1.82)

Time Shift -0.00610

(-3.30)

-0.00587

(-2.58)

-0.00542

(-2.67)

Old Comm. - 0.541

(1.71)

0.525

(1.66)

Republican - -5.41

(-2.00)

-4.76

(-2.05)

President - .564

(.48)

-

Adj RSquare.478 .572 .565

Success

Rate

84.2% 91.4% 90.0%

Log

Likelihood

-22.53 -19.01 -19.13
24

Table 7

Regression Results - External Political Models

(t-statistics in parentheses)

Variable Sales,Full

House Model

Log Sales,

Committee

Model

Price, Subcommittee

 Model

Log Price,

Subcommittee

Chair Model

Constant 0.958

(.46)

1.12

(0.60)

1.85

(.93)

4.72

(1.84)

Herfindahl .000566

(1.78)

.000477

(1.77)

.000610

(1.98)

.000597

(1.81)

Barrier 2.91

(3.75)

2.94

(3.81)

3.48

(3.33)

3.91

(3.25)

Vertical -0.944

(-1.16)

-0.847

(-1.07)

-1.16

(-1.25)

-1.784

(-1.73)

Pot. Comp. -1.49

(-1.74)

-1.26

(-1.53)

-1.96

(-2.17)

-1.78

(-1.91)

Time Shift -0.00478

(-2.25)

-0.00503

(-1.64)

-0.00476

(-1.94)

-0.00765

(-2.27)

Old Comm. 0.510

(1.45)

0.564

(1.65)

0.260

(0.65)

0.584

(1.58)

Republican -4.26

(-1.77)

-5.00

(-2.06)

-5.93

(-2.20)

-2.80

(-1.04)

Sales or

Price

-.00482

(-.70)

-0.198

(-.88)

-.000994

(-1.21)

-0.276

(-1.28)

Senate

Index

0.0157

(.48)

-0.00165

(-0.064)

0.0285

(1.20)

0.0111

(0.86)

House

Index

-0.0266

(-0.79)

0.00705

(0.29)

-0.0325

(-1.63)

-0.0582

(-2.36)

Adj. R-Square .577 .592 .630 .697

Success

Rate

88.6% 91.4% 90.0% 91.4%

Log

Likelihood

-18.43 -18.62 -16.36 -14.19
25

Table 8

Regression Results - Pork Barrel Model

Variable Subcommittee

Number

Committee Number

Constant 0.735

(0.587)

0.649

(0.486)

Herfindahl .00495

(1.88)

.00485

(1.84)

Barrier 2.805

(3.73)

2.730

(3.59)

Vertical -0.762

(-0.953)

-0.807

(-1.05)

Pot. Corp. -1.402

(-1.73)

-1.340

(-1.61)

Time Shift -.0504

(-2.36)

-.0515

(-2.49)

Old Comm. 0.553

(1.72)

0.510

(1.64)

Republican -4.87

(-2.06)

-4.653

(-1.96)

Pork Barrel

Index

0.156

(0.48)

.0941

(0.48)

Adj. R-Square 0.576 0.571

Success Rate 92.8% 90.0%

Log Likelihood -19.02 -19.02
26

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