How to talk about the merger trials like a pro

November 18, 2016

 

In the complaint filed by the DOJ to enjoin the merger of Anthem and Cigna, the merger is characterized as an attempt to “combine the few remaining commercial health insurance options for business and individuals in markets throughout the country.” This Monday, the trial will begin and months of speculation about how the two sides will present their case will be answered. But as much as the trial will satisfy our desire to know what the parties have been working on all these months, there will undeniably be features that are familiar to almost any merger trial. 

 

A “brown shoe?” What? Brown Shoe was a Supreme Court case which established the principles affecting the definition of the relevant product market. The rule states that the “outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” Essentially, the parties need to establish whether a reasonable person would view two products as substitutes and whether changes in the market for one good have an effect on the other. Starting Monday, Anthem will want to convince the judge that the two companies mostly operate in separate markets, and then it would follow that a merger would have no substantial effect on concentration.

 

Hypothetical monopolist test. Brown Shoe laid out factors, but modern antitrust trials like to rely on modern economics. Those economics have settled on one test in particular for proving a market - the hypothetical monopolist test, and this means expert economists will be testifying on both sides. The hypothetical monopolist test goes to the heart of what a merger trial is - a fight over who has the best prediction of the future. The test typically asks whether a price increase of 5% will result in a substantial number of customers buying a different product, such that the monopolist does not gain anything — and by extension does not have monopoly power. The DOJ will try to show that, based on their modeling of the markets, customers will have nowhere else to turn because a combined Anthem and Cigna will have enough market power to raise prices without losing profits. Anthem will then put on its economist to testify that the product market is bigger, and if they tried to raise prices they would lose business to other products outside of the government's defined market. The market definition is where many merger battles are fought because if a company controls too much of one product market then customers will have nowhere else to go, and the company will have an incentive to raise prices. Why do we still care about Brown Shoe factors if economists like the hypothetical monopolist test? Because if no one wins the battle of the economists, the judge will likely default back to the Brown Shoe factors in making her determination.

 

Precedent. Invoking a recent decision, in this case, “Staples” is likely to come up. In May, the court handed down a decision to block the proposed merger of Staples and Office Depot, the nation’s two largest office supply superstores. A main contention of the case was the market definition. In the decision, the court found that the national market was separate from individual markets because national companies have a desire to use a single retailer for office supplies in all their offices nation-wide. In the Anthem-Cigna case, the DOJ needs to establish that national accounts are their own market. They are likely to point to a definitive, recent case that supports this view: Staples. 

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