Quality-Enhancing Merger Efficiencies

I. INTRODUCTIONThe role of merger efficiencies remains unresolved in U.S. antitrust law and policy.1 Within the world of merger efficiencies, the antitrust agencies and courts have spent less effort in analyzing and developing workable legal rules with regard to quality-enhancing efficiencies vis-a-vis cost-reducing efficiencies. As this Essay explains, agencies and courts offer greater weight to price than quality efficiencies. In some cases this does not affect the outcome of a case. Indeed, only a small number of litigated cases or matters before the agencies have been decided on efficiency grounds.2 Among cases in which efficiencies matter, a merger in which there are no cost efficiencies also may be a situation in which there are no quality efficiencies. Nevertheless, sometimes there may be situations in which the quality-enhancing efficiencies may be substantial, even while the cost-reducing efficiencies may not be. Such mergers should be allowed to proceed. By providing greater weight to cost efficiencies at the expense of quality enhancing efficiencies, antitrust policy creates market distortions. Ignoring changes in quality or underemphasizing such changes "in a merger analysis can lead to a bias in estimated welfare effects" of mergers and to mistaken outcomes.3By creating a false distinction between price and quality efficiencies, antitrust merger policy is out of step with antitrust policy in the area of conduct. The fundamental question, for example, regarding occupational licenses, such as in California Dental, is the price-versus-quality question and the desire for quality assurance.4 The same can be said in Leegin about Resale Price Maintenance ("RPM") both in the free rider and non-free-rider contexts.5 This Essay seeks to provide some guidance on how to create an administrable system for measuring quality-enhancing efficiencies.Upon first glance, costs seem easier to measure than quality factors. Unlike price, where lower price is the single dimension (assuming one product), quality may have multiple dimensions. However, such reasoning is deceptively easy and misguided. Even in a pricing context, cost is not always easy to determine. A multi-product discount can mean that price may be higher for one product but the entire bundle would be cheaper.6 Limiting oneself only to price, there are multiple ways to determine the appropriate cost-based tests in the context of single-firm conduct.7 In this sense, the overriding concern of administrability regarding quality measurement seems out of place as price/cost tests may be equally difficult for courts to figure out as quality measurement.Quality issues remain critical to antitrust merger analysis. The purpose of section 7 of the Clayton Act is to prevent mergers that create monopolies or oligopolies.8 The 2010 Horizontal Merger Guidelines ("2010 Merger Guidelines") express this concern specific to quality-enhancing efficiencies, noting that "purported efficiency claims based on lower prices can be undermined if they rest on reductions in product quality or variety that customers value."9 That is, quality degradation, if it results in lower cost, is not to be supported under efficiencies analysis. When both costs and quality efficiencies increase, however, the 2010 Merger Guidelines are silent. They contemplate only situations in which "[e]fficiencies also may lead to new or improved products, even if they do not immediately and directly affect price."10 Increased quality may also impact mergers where there is no price decrease or where prices go up post-merger.Understanding quality efficiencies is especially important today, after the increased merger activity that has resulted from the passage of the Patient Protection and Affordable Care Act ("ACA").11 The ACA promises that increased integration and a shiftfrom quantity to quality performance through increased competition will create a system in which quality will go up and prices will go down. …