Opinion ID: 441760
Heading Depth: 2
Heading Rank: 2

Heading: WMI's Rebuttal

Text: 26 A post-merger market share of 48.8% is sufficient to establish prima facie illegality under United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963), and its progeny. That decision held that large market shares are a convenient proxy for appraising the danger of monopoly power resulting from a horizontal merger. Id. at 362-63, 83 S.Ct. at 1740-41. Under its rationale, a merger resulting in a large market share is presumptively illegal, rebuttable only by a demonstration that the merger will not have anticompetitive effects. Id. at 363, 83 S.Ct. at 1741. Thus in United States v. General Dynamics Corp., 415 U.S. 486, 94 S.Ct. 1186, 39 L.Ed.2d 530 (1974), the Court upheld a merger of two leading coal producers because substantially all of the production of one firm was tied up in long-term contracts and its reserves were insubstantial. Since that firm's future ability to compete was negligible, the Court reasoned that its disappearance as an independent competitor could not affect the market. 27 WMI does not claim that 48.8% is too small a share to trigger the Philadelphia National Bank presumption. Rather, it argues that the presumption is rebutted by the fact that competitors can enter the Dallas waste hauling market with such ease that the finding of a 48.8% market share does not accurately reflect market power. WMI argues that it is unable to raise prices over the competitive level because new firms would quickly enter the market and undercut them. 28 In discussing ease of entry, Judge Griesa stated: 29 Defendants in the present case urge that even if the Government has made a prima facie showing on the basis of market share statistics, there are circumstances which undermine the significance of these statistics. Among the arguments in this regard are: 30 (1) It is so easy to enter the trash collection market that the relative competitive strength of a company cannot properly be measured solely with respect to the existing companies in the market, but must take into account potential new entrants.(2) Over the past several years there has been a trend toward deconcentration, involving steady entry into the market by new companies. 31    32    33 [T]he Court agrees that entry into the trash collection business is relatively easy, and the barriers to entry not great. A person wanting to start in the trash collection business can acquire a truck, a few containers, drive the truck himself, and operate out of his home. A great deal depends on the individual's personal initiative, and whether he has the desire and energy to perform a high quality of service. If he measures up well by these standards, he can compete successfully with any other company for a portion of the trade, even though a small portion. If he does not measure up, he is less successful or fails. 34 Over the last 10 years or so a number of companies have started in the commercial trash collection business, performing containerized service. A few, including TIDI and ACS, have grown to substantial size, presumably because of good management and service, and also as a result of acquiring other companies. The majority of new entrants have either remained relatively small or disappeared as independent entities by going out of business or being acquired by larger companies. 35 There is no showing of any circumstance, related to ease of entry or the trend of the business, which promises in and of itself to materially erode the competitive strength of TIDI and ACS. With regard to the legal effect of low entry barriers and potential competition in a Sec. 7 case, there is no persuasive authority for allowing such factors to overcome a strong prima facie showing of concentration in the existing competitive structure. 36 The Supreme Court has never directly held that ease of entry may rebut a showing of prima facie illegality under Philadelphia National Bank. However, on several occasions it has held that appraisal of the impact of a proposed merger upon competition must take into account potential competition from firms not presently active in the relevant product and geographic markets. United States v. Falstaff Brewing Corp., 410 U.S. 526, 93 S.Ct. 1096, 35 L.Ed.2d 475 (1973); Federal Trade Commission v. Procter & Gamble Co., 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967); United States v. Penn-Olin Chemical Co., 378 U.S. 158, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964). Falstaff, for example, involved a large national brewer that did no business in the northeast section of the country until it acquired Narrangansett, the largest brewer in New England. Reversing a district court finding that Falstaff was not likely to enter the New England market de novo, the Supreme Court concluded that the very existence of Falstaff as a potential entrant might constrain brewers in the northeast to maintain competitive price levels as a means of forestalling entry by Falstaff. Under that decision, therefore, potential entrants must be considered in appraising a merger. 37 Moreover, under General Dynamics, a substantial existing market share is insufficient to void a merger where that share is misleading as to actual future competitive effect. In that case, long-term contracts and declining reserves negated the inference of market power drawn from the existing market share. In the present case, a market definition artificially restricted to existing firms competing at one moment may yield market share statistics that are not an accurate proxy for market power when substantial potential competition able to respond quickly to price increases exists. 38 Finally, the Merger Guidelines issued by the government itself not only recognize the economic principle that ease of entry is relevant to appraising the impact upon competition of a merger but also state that it may override all other factors. Where entry is so easy that existing competitors could not succeed in raising prices for any significant period of time, the government has announced that it will usually not challenge a merger. United States Department of Justice 1984 Merger Guidelines, 46 Antitrust & Trade Reg.Rep. (BNA) No. 1169 Spec.Supp. Sec. 3.3, at S-6. If the Department of Justice routinely considers ease of entry as relevant to determining the competitive impact of a merger, it may not argue to a court addressing the same issue that ease of entry is irrelevant. We conclude, therefore, that entry by potential competitors may be considered in appraising whether a merger will substantially lessen competition. 4 39 Turning to the evidence in this case, we believe that entry into the relevant product and geographic market by new firms or by existing firms in the Fort Worth area is so easy that any anti-competitive impact of the merger before us would be eliminated more quickly by such competition than by litigation. See R. Bork, The Antitrust Paradox 222 (1978). Judge Griesa specifically found that individuals operating out of their homes can acquire trucks and some containers and compete successfully with any other company. The government's response to this factual finding is largely to the effect that economies of scale are more important than Judge Griesa believed. As with his other findings of fact, however, this one is not clearly erroneous, as there are examples in the record of such entrepreneurs entering and prospering. 40 In any event, entry by larger companies is also relatively easy. At existing prices most Fort Worth and Dallas haulers operate within their own cities, but it is clear from the record that Fort Worth haulers could easily establish themselves in Dallas if the price of trash collection rose above the competitive level. Although it may be true that daily travel from Fort Worth to Dallas and back is costly, there is no barrier to Fort Worth haulers' acquiring garage facilities in Dallas permitting them to station some of their trucks there permanently or for portions of each week. The risks of such a strategy are low since substantial business can be assured through bidding on contracts even before such garage facilities are acquired, as one Fort Worth firm demonstrated by winning such a contract and then opening a facility in a Dallas suburb. That example can hardly be ignored by WMI or other Dallas haulers (not to mention their customers) in arriving at contract bids. The existence of haulers in Fort Worth, therefore, constrains prices charged by Dallas haulers, much as Falstaff constrained pricing by northeast breweries. 41 The fact that such entry has not happened more frequently reflects only the existence of competitive, entry-forestalling prices, as contemplated in Falstaff. 410 U.S. at 532-537, 93 S.Ct. at 1100-1103. We have no doubt that, if WMI were now to seek to acquire a major hauler in Fort Worth, the Falstaff decision would compel us to treat the Fort Worth hauler as a potential competitor of WMI. We perceive no reason why Fort Worth haulers should be treated as potential competitors in those circumstances but not in the present case. 42 Judge Griesa's conclusion that there is no showing of any circumstances, related to ease of entry or the trend of the business, which promises in and of itself to materially erode the competitive strength of TIDI and ACS is consistent with our decision. TIDI and ACS may well retain their present market share. However, in view of the findings as to ease of entry, that share can be retained only by competitive pricing. Ease of entry constrains not only WMI, but every firm in the market. Should WMI attempt to exercise market power by raising prices, none of its smaller competitors would be able to follow the price increases because of the ease with which new competitors would appear. WMI would then face lower prices charged by all existing competitors as well as entry by new ones, a condition fatal to its economic prospects if not rectified. 43 The government argues that consumers may prefer WMI's services, even at a higher price, over those of a new entrant because of its proven track record. We fail to see how the existence of good will achieved through effective service is an impediment to, rather than the natural result of, competition. The government also argues that existing contracts bind most customers to a particular hauler and thereby prevent new entrants from acquiring business. If so, they also prevent the price increases until new entrants can submit competitive bids. 44 Given Judge Griesa's factual findings, we conclude that the 48.8% market share attributed to WMI does not accurately reflect future market power. Since that power is in fact insubstantial, the merger does not, therefore, substantially lessen competition in the relevant market and does not violate Section 7. 45 Reversed.