Two of the most important attributes Americans look for when buying a product or service are price and variety. Consumers like to have a wide selection of options to choose from, especially if they can compare prices and make sure they are getting the best value for their money. However, both of these factors rely on business competition. The market needs to have many companies in the same sector in order to create the incentive needed to keep prices low and to make sure there are products that fit the needs of different types of consumers. The Federal Trade Commission (FTC) is responsible for making sure the competition stays in tact, especially when large companies decide to merge. However, it is now always clear why some deals make it through and others are blocked.
Last week, Sysco Corp. terminated its merger agreement with US Foods after the FTC blocked the deal claiming the merged entity would account for 75% of the sales to national customers of broadline services, making it virtually impossible for any other company to offset the competition that would have been lost. Sysco filed a memorandum to defend the merger when it was blocked, saying the transaction would actually create more competition and reduce its costs, allowing it to lower prices. It also argued that the FTC’s market statistics were incorrect, using an example where the FTC claimed that the combined company would control the market in San Diego, but Sysco says more than 24 companies compete in the area.
In some cases, the FTC will require companies to divest assets, such as stores or restaurant locations. The FTC approved the merger of Dollar Tree Inc. and Family Dollar Stores Inc., under the terms that it would sell 330 stores to Sycamore Partners. It stated that the companies go “head-to-head in terms of price, product assortment, and quality” and identified the markets in 35 states where competition would be lost because of the merger. In the case of the Safeway and Albertsons merger, it determined that 168 stores would need to be divested in eight states to four buyers.
The question remains, how does the FTC come to these conclusions and decide what mergers would be anticompetitive and which would not? According to the agency’sHorizontal Merger Guidelines, the key question it asks is “whether the proposed merger is likely to create or enhance market power or facilitate its exercise.” The largest concern arises in the case of horizontal mergers, or those between direct competitors. The agency also looks for historical events that may shed light on the competitive effects of the merger, such as similar mergers that may have the same outcome on the market’s competition. It also looks at whether the merger will lessen competition by eliminating a “maverick” firm, one that plays a disruptive role in the market to the benefit of customers. It uses not only testimony and data from the merging companies to make its decision, but also information from customers, suppliers, industry analysts and anyone else who may offer helpful information.
The FTC is looking to make sure that prices will not increase because of the loss of competition, and that supply and demand will remain in every market so that if a consumer wishes to substitute a product because of price or other reasons, there will be another way for the consumer to get that item. It may sometimes seem like an arbitrary decision to companies that are blocked from merging, but learning all the facts about antitrust laws first can help make the process a little bit smoother.