ZF Friedrichshafen AG and TRW Automotive Holdings Corp; Analysis of Proposed Consent Order To Aid Public Comment

ZF Friedrichshafen AG and TRW Automotive Holdings Corp; Analysis of Proposed Consent Order To Aid Public Comment

Topics: ZF, TRW Automotive

ZF Friedrichshafen AG and TRW Automotive Holdings Corp; Analysis of Proposed Consent Order To Aid Public Comment

Donald S. Clark
Federal Trade Commission
May 15, 2015

[Federal Register Volume 80, Number 94 (Friday, May 15, 2015)]
[Notices]
[Pages 27954-27961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11721]

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FEDERAL TRADE COMMISSION

[File No. 141-0235]

ZF Friedrichshafen AG and TRW Automotive Holdings Corp; Analysis
of Proposed Consent Order To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair methods of competition.
The attached Analysis to Aid Public Comment describes both the
allegations in the draft complaint and the terms of the consent order--
embodied in the consent agreement--that would settle these allegations.

DATES: Comments must be received on or before June 5, 2015.

ADDRESSES: Interested parties may file a comment at https://ftcpublic.commentworks.com/ftc/zftrwautomativeconsent online or on
paper, by following the instructions in the Request for Comment part of
the SUPPLEMENTARY INFORMATION section below. Write ``ZF Friedrichshafen
AG's and TRW Automotive Holdings Corp.--Consent Agreement; File No.
141-0235'' on your comment and file your comment online at https://ftcpublic.commentworks.com/ftc/zftrwautomativeconsent by following the
instructions on the web-based form. If you prefer to file your comment
on paper, write ``ZF Friedrichshafen AG's and TRW Automotive Holdings
Corp.--Consent Agreement; File No. 141-0235'' on your comment and on
the envelope, and mail your comment to the following address: Federal
Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW.,
Suite CC-5610 (Annex D), Washington, DC 20580, or deliver your comment
to the following address: Federal Trade Commission, Office of the
Secretary, Constitution Center, 400 7th Street SW., 5th Floor, Suite
5610 (Annex D), Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Stephen Antonio, Bureau of
Competition, (202-326-2536), 600 Pennsylvania Avenue NW., Washington,
DC 20580.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 2.34, 16 CFR 2.34,
notice is hereby given that the above-captioned consent agreement
containing consent orders to cease and desist, having been filed with
and accepted, subject to final approval, by the Commission, has been
placed on the public record for a period of thirty (30) days. The
following Analysis to Aid Public Comment describes the terms of the
consent agreement, and the allegations in the complaint. An electronic
copy of the full text of the consent agreement package can be obtained
from the FTC Home Page (for May 5, 2015), on the World Wide Web, at
http://www.ftc.gov/os/actions.shtm.
You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before June 5, 2015.
Write ``ZF Friedrichshafen AG's and TRW Automotive Holdings Corp.--
Consent Agreement; File No. 141-0235'' on your comment. Your comment--
including your name and your state--will be placed on the public record
of this proceeding, including, to the extent practicable, on the public
Commission Web site, at http://www.ftc.gov/os/publiccomments.shtm. As a
matter of discretion, the Commission tries to remove individuals' home
contact information from comments before placing them on the Commission
Web site.
Because your comment will be made public, you are solely
responsible for making sure that your comment does not include any
sensitive personal information, like anyone's Social Security number,
date of birth, driver's license number or other state identification
number or foreign country equivalent, passport number, financial
account number, or credit or debit card number. You are also solely
responsible for making sure that your comment does not include any
sensitive health information, like medical records or other
individually identifiable health information. In addition, do not
include any ``[t]rade secret or any commercial or financial information
which . . . is privileged or confidential,'' as discussed in Section
6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR
4.10(a)(2). In particular, do not include competitively sensitive
information such as costs, sales statistics, inventories, formulas,
patterns, devices, manufacturing processes, or customer names.
If you want the Commission to give your comment confidential
treatment, you must file it in paper form, with a request for
confidential treatment, and you have to follow the procedure explained
in FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ Your comment will be kept
confidential only if the FTC General Counsel, in his or her sole
discretion, grants your request in accordance with the law and the
public interest.
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\1\ In particular, the written request for confidential
treatment that accompanies the comment must include the factual and
legal basis for the request, and must identify the specific portions
of the comment to be withheld from the public record. See FTC Rule
4.9(c), 16 CFR 4.9(c).
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Postal mail addressed to the Commission is subject to delay due to
heightened security screening. As a result, we encourage you to submit
your comments online. To make sure that the Commission considers your
online comment, you must file it at https://ftcpublic.commentworks.com/ftc/zftrwautomativeconsent by following the instructions on the web-
based form. If this Notice appears at http://www.regulations.gov/#!home, you also may file a comment through that Web site.
If you file your comment on paper, write ``ZF Friedrichshafen AG's
and TRW Automotive Holdings Corp.--Consent Agreement; File No. 141-
0235'' on your comment and on the envelope, and mail your comment to
the following address: Federal Trade Commission, Office of the
Secretary, 600 Pennsylvania Avenue NW., Suite CC-5610 (Annex D),
Washington, DC 20580, or deliver your comment to the following address:
Federal Trade Commission, Office of the Secretary, Constitution Center,
400 7th Street SW., 5th Floor, Suite 5610 (Annex D), Washington, DC
20024. If possible, submit your paper comment to the Commission by
courier or overnight service.
Visit the Commission Web site at http://www.ftc.gov to read this
Notice and the news release describing it. The FTC Act and other laws
that the Commission administers permit the collection of public
comments to consider and use in this proceeding as appropriate. The
Commission will consider all timely and responsive public comments that
it receives on or before June 5, 2015. For information on the
Commission's privacy policy, including routine uses permitted by the
Privacy Act, see http://www.ftc.gov/ftc/privacy.htm.

[[Page 27955]]

Analysis of Agreement Containing Consent Order To Aid Public Comment

Introduction

The Federal Trade Commission (``Commission'') has accepted from ZF
Friedrichshafen AG (``ZF'') and TRW Automotive Holdings Corp.
(``TRW''), subject to final approval, an Agreement Containing Consent
Order (``Consent Agreement'') designed to remedy the anticompetitive
effects resulting from ZF's proposed acquisition of TRW.
Pursuant to an Agreement and Plan of Merger dated September 15,
2014, the parties agreed that ZF would acquire TRW for $105.60 per
share in an all-cash deal valued at approximately $12.4 billion (``the
Acquisition''). The proposed Acquisition would result in a duopoly in
the heavy vehicle tie rod market. The Commission's Complaint alleges
that the proposed Acquisition, if consummated, would violate Section 7
of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the FTC
Act, as amended, 15 U.S.C. 45, by substantially lessening competition
in the market for heavy vehicle tie rods in North America.
Under the terms of the proposed Decision and Order (``Order'')
contained in the Consent Agreement, the parties are required to divest
TRW's Linkage and Suspension Business in a manner, and to an acquirer,
that meets Commission approval. The divestiture package includes five
manufacturing facilities in North America and Europe, along with
related assets including intellectual property. The acquirer also has
the option to enter into transitional services and supply agreements.
The Consent Agreement provides an acquirer with everything needed to
compete effectively in the North American heavy vehicle tie rod market.
The parties must complete the divestiture within six months of
executing the Consent Agreement.
The Consent Agreement has been placed on the public record for 30
days to solicit comments from interested persons. Comments received
during this period will become part of the public record. After 30
days, the Commission will again review the Consent Agreement and the
comments received, and decide whether it should withdraw from the
Consent Agreement, modify it, or make it final.

The Parties

Headquartered in Friedrichshafen, Germany, ZF is a privately held
global automotive and industrial products manufacturer. ZF makes light
and heavy vehicle components for the powertrain, chassis, and
driveline. ZF designs, manufacturers, and sells heavy vehicle tie rods,
amongst several other products, in its chassis division.
Headquartered in Livonia, Michigan, TRW sells chassis systems,
electronic systems, passive occupant safety systems, and other
automotive components. Like ZF, TRW designs, manufactures, and sells
heavy vehicle tie rods.

The Relevant Product and Market Structure

The relevant line of commerce in which to analyze the effects of
the Acquisition is heavy vehicle tie rods. A heavy vehicle is generally
defined as one that weighs six tons or more, and a tie rod is a rigid
connecter that links a vehicle's individual wheels with the steering
control mechanism. Customers and other market participants did not
identify any substitutes for heavy vehicle tie rods.
North America is the relevant geographic market in which to analyze
the effects of the Acquisition on the heavy vehicle tie rod market. The
size and weight of heavy vehicle tie rods generally make it
uneconomical to ship them long distances. Customers interviewed
primarily consider manufacturers in North America, and have found more
distant firms uncompetitive for reasons including: (1) Price; (2)
logistics; and (3) quality. Therefore, North America is the relevant
geographic market.
The market for heavy vehicle tie rods in North America is highly
concentrated. It is served primarily by ZF, TRW, and USK Internacional
S.A. DE C.V. (``Urresko''). These three firms have a share of nearly
99% of the market based on unit sales. The merger would reduce the
number of competitors from three to two, and increase the Herfindahl-
Hirschman Index from 4,218 to 5,046, an increase of 828.

Entry

Entry into the North American heavy vehicle tie rod market is not
likely to deter or counteract any anticompetitive effects of the
proposed Acquisition. Entry is unlikely in light of the relatively
small market size, strong position of incumbents, high capital costs,
switching costs, and knowledge barriers that exist. The parties did not
identify any likely entrants, and those firms best situated for entry--
manufacturers of related heavy vehicle components--expressed no
interest in entering the North American heavy vehicle tie rod market.

Effects of the Acquisition

The proposed Acquisition would increase the likelihood of
coordinated interaction among the remaining competitors in the North
American heavy vehicle tie rod market. The combined company would have
only one remaining significant competitor in North America, Urresko.
Reducing the number of competitors from three to two would eliminate
much uncertainty and make it easier for the remaining firms to reach
agreement on terms of coordination, whether the coordination focuses on
customer allocation, price, or some other aspect of competition.
Additionally, the proposed Acquisition would eliminate direct
competition between ZF and TRW, resulting in the increased probability
that customers would pay higher prices for heavy vehicle tie rods. In
the past, customers have been able to use competition between ZF and
TRW to obtain better prices by obtaining competing bids. Customers have
also switched between ZF and TRW. That competition would be lost absent
the merger.

The Consent Agreement

The Consent Agreement eliminates the competitive concerns raised by
ZF's proposed acquisition of TRW by requiring the parties to divest
TRW's North American and European Linkage and Suspension Business
(``the L&S Business''). The proposed divestiture includes everything
needed for an acquirer to compete effectively in the North American
market for heavy vehicle tie rods, and also includes additional
products that ensure the business will be viable. Given the robust
nature of the divested business, the Commission is confident that a
post-order divestiture is sufficient to protect its interest in
restoring competition.
Pursuant to the Order, the parties are required, no later than six
months from execution of the Consent Agreement, to divest the L&S
Business to a Commission-approved acquirer. That business consists of
both heavy and light vehicle components, and includes--in addition to
tie rods--control arms, ball joints, stabilizer links, conventional
steering linkages, drag links, V-links, radius rods, and I-shafts. The
divestiture buyer will receive all rights and assets relating to the
L&S Business, including five TRW manufacturing facilities, Portland
(U.S.), Tillsonburg-Plant 2 (Canada), St. Catharines (Canada), Dacice
(Czech Republic), and Krefeld-Gellep (Germany), as well as leased space
previously occupied by L&S research

[[Page 27956]]

and development at TRW's Dusseldorf Tech Center. The divested assets
also include intellectual property rights as well as all books,
records, and confidential business information related to the L&S
Business.
To ensure that the divestiture is successful, the Order requires
the parties to provide transition services such as logistical and
administrative support at the option of the acquirer. Moreover, the
acquirer will have the option to enter into a transition supply
agreement with the parties for key manufacturing inputs necessary to
perform existing customer contracts. The Consent Agreement also
includes other standard terms designed to ensure the viability of the
divestiture, including requirements that the parties assist the
acquirer in hiring the existing work force of the business, and refrain
from soliciting those employees for up to two years.
Given the robustness of the divested business and the protections
contained in the Order, the Commission is confident that a post-order
divestiture will be sufficient to preserve competition. The L&S
Business has been run largely as a standalone business within TRW, and
potential buyers have confirmed that the divested assets include
everything necessary to compete effectively as a viable business.
Similarly, potential customers have confirmed that an acquirer of the
L&S Business would be a workable option as a supplier.
To ensure compliance with the Order, the Commission will appoint an
Interim Monitor to oversee ZF's and TRW's performance of their
obligations pursuant to the Consent Agreement, and to keep the
Commission informed about the status of the divestiture. The Order also
allows the Commission to appoint a Divestiture Trustee to accomplish
the divestiture if the parties fail to divest within the required
timeframe. Lastly, the Consent Agreement contains standard reporting
requirements and terminates in ten years.
The Commission has also issued an Order to Hold Separate and
Maintain Assets to protect the assets until they are divested. During
the hold separate period, the parties must fund the business'
operations, including capital projects, according to existing plans. To
ensure compliance with the Hold Separate Order, a Commission-approved
Hold Separate Monitor will oversee the L&S Business during the interim
period.

Opportunity for Public Comment

The purpose of this analysis is to facilitate public comment on the
Consent Agreement to aid the Commission in determining whether it
should make the Consent Agreement final. This analysis is not an
official interpretation of the proposed Consent Agreement and does not
modify its terms in any way.

By direction of the Commission, Commissioner Wright dissenting.
Donald S. Clark,
Secretary.

Statement of the Federal Trade Commission

In the Matter of ZF Friedrichshafen AG and TRW Automotive Holdings
Corp.

The Commission has issued a proposed complaint and consent order to
address narrow competitive concerns associated with ZF Friedrichshafen
AG's proposed $12.4 billion acquisition of TRW Automotive Holdings
Corp.\1\ Specifically, we have reason to believe that this proposed
acquisition is likely to substantially reduce competition in the
manufacture and sale of heavy vehicle tie rods in North America. The
proposed remedy, which involves a divestiture of TRW's linkage and
suspension business in North America and Europe, addresses our
competitive concerns and will bolster the viability of the divested
business in the hands of a buyer, without eliminating efficiencies that
otherwise might arise from the combination of the two companies.
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\1\ This statement reflects the views of Chairwoman Ramirez and
Commissioners Brill, Ohlhausen, and McSweeny.
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ZF and TRW are global automotive parts manufacturers. Both
companies manufacture and sell a wide variety of components for
discrete systems within a motor vehicle such as the chassis,
powertrain, and suspension systems. They each have production
facilities located throughout the United States, Canada, and Mexico.
The proposed transaction will create the second-largest global auto
parts supplier. Our competitive concerns arise from a limited aspect of
the proposed combination, namely, its likely effect in the market for
the manufacture and sale of heavy vehicle tie rods for customers in
North America. Tie rods are part of a motor vehicle's steering and
linkage system; they are rigid connectors that link the wheels to the
vehicle's steering control mechanism. To perform their intended
function within the linkage systems of vehicles weighing six tons or
more, these tie rods have to be large (approximately three to six feet
long) and heavy (weighing approximately 50 pounds). This means that tie
rods designed for light vehicles are not practical substitutes since
they would be too small and light and therefore not as strong
structurally. At the same time, tie rods designed for much heavier,
industrial vehicles (like mining vehicles weighing hundreds of tons)
would not be substitutes either.
Because of their weight, it is not economical to ship heavy vehicle
tie rods over long distances. For this reason, North American customers
primarily consider manufacturers with production facilities in the
United States, Canada, and Mexico and generally do not regard suppliers
outside of North America as viable options for reasons of price,
logistics, and quality. As a result, ZF and TRW, together with a
Mexican firm, USK Internacional, S.A. de C.V. (``Urresko''), account
for virtually all (99%) of the sales of heavy vehicle tie rods in North
America. We estimate the market shares of ZF, TRW, and Urresko to be
23%, 18%, and 58%, respectively. Fringe competitors hold the remaining
1% market share.
The parties' proposed combination will therefore reduce the number
of significant competitors in the relevant market from three to two and
substantially increase concentration in an already highly concentrated
market.\2\ Based on this increase in concentration and current market
conditions, we believe the transaction is likely to produce substantial
anticompetitive effects in the relevant market, in particular, by
increasing the potential for coordination. Furthermore, there is
unlikely to be any entry that would alleviate our competitive concerns.
The small market size, the strong position of the incumbents, switching
costs, and capital and knowledge barriers, among other factors, would
more than likely deter North American manufacturers of related
automotive parts--the most logical candidates for entry--from expanding
their product offerings to include heavy vehicle tie rods.
Consequently, we have reason to believe that the proposed combination
would substantially lessen competition in the relevant market and harm
customers and consumers, thereby violating Section 7 of the Clayton
Act.
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\2\ The proposed transaction would increase the Herfindahl-
Hirschman Index (``HHI'') in the relevant market from 4,218 to
5,046. The threshold at which a market is considered ``highly
concentrated'' under the Merger Guidelines is 2,500. See U.S. Dep't
of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines Sec.
5.3 (2010).
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In light of the foregoing, we respectfully disagree with
Commissioner Wright's assertions that we lack a ``credible basis'' on
which to conclude that the merger may enhance

[[Page 27957]]

the risk of coordination and that our action is otherwise inconsistent
with the 2010 Horizontal Merger Guidelines.\3\ Under the 2010
Guidelines, substantial increases in concentration caused by a merger
rightly continue to play an important role in our merger analysis.\4\
They do so for the simple reason that highly concentrated markets are
more conducive to anticompetitive outcomes than less concentrated
markets.\5\ Accordingly, the lens we apply to the evidence in a merger
that reduces the number of firms in a market to three or two is, and
should be, different than the lens we apply to a merger that reduces
the number of firms to seven or six. Where, as here, a proposed merger
significantly increases concentration in an already highly concentrated
market, a presumption of competitive harm is justified under both the
Guidelines and well-established case law.\6\
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\3\ Dissenting Statement of Commissioner Joshua D. Wright at 3-
4.
\4\ See Carl Shapiro, The 2010 Horizontal Merger Guidelines:
From Hedgehog to Fox in Forty Years, 77 Antitrust L.J. 701 (2010)
(``Thus, like the fox, the 2010 Guidelines embrace multiple methods.
But this certainly does not mean they reject the use of market
concentration to predict competitive effects, as can be seen in
Sections 2.1.3 and 5.''). As Commissioner Wright acknowledges, ``The
predictive power of market share and market concentration data is
informed by economic theory and available empirical evidence.''
Wright Dissent at 7.
\5\ See, e.g., Steven C. Salop, The Evolution and Vitality of
Merger Presumptions: A Decision-Theoretic Approach 11 (Georgetown
Law Faculty Publications and Other Works, Working Paper No. 1304,
2014), available at http://scholarship.law.georgetown.edu/facpub/1304 (``[V]arious theories of oligopoly conduct--both static and
dynamic models of firm interaction--are consistent with the view
that competition with fewer significant firms on average is
associated with higher prices. . . . Accordingly, a horizontal
merger reducing the number of rivals from four to three, or three to
two, would be more likely to raise competitive concerns than one
reducing the number from ten to nine, ceteris paribus.''); Steffen
Huck, et al., Two Are Few and Four Are Many: Number Effects from
Experimental Oligopolies, 53 J. Econ. Behavior & Org. 435, 443
(2004) (testing the frequency of collusive outcomes in Cournot
oligopolies and finding ``clear evidence that there is a qualitative
difference between two and four or more firms''); Timothy F.
Bresnahan & Peter C. Reiss, Entry and Competition in Concentrated
Markets, 99 J. Pol. Econ. 977, 1006 (1991) (finding, in a study of
tire prices, that ``[m]arkets with three or more dealers have lower
prices than monopolists or duopolists,'' and noting that, ``while
prices level off between three and five dealers, they are higher
than unconcentrated market prices'').
\6\ See Merger Guidelines Sec. 2.1.3 (``Mergers that cause a
significant increase in concentration and result in highly
concentrated markets are presumed to be likely to enhance market
power, but this presumption can be rebutted by persuasive evidence
showing that the merger is unlikely to enhance market power.'');
Chicago Bridge & Iron Co., N.V. v. FTC, 534 F.3d 410, 423 (5th Cir.
2008) (``Typically, the Government establishes a prima facie case by
showing that the transaction in question will significantly increase
market concentration, thereby creating a presumption that the
transaction is likely to substantially lessen competition.''); FTC
v. H.J. Heinz Co., 246 F.3d 708, 716 (D.C. Cir. 2001) (merger to
duopoly creates a rebuttable presumption of anticompetitive harm
through direct or tacit coordination).
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Despite Commissioner Wright's insistence to the contrary, our
inquiry extended beyond consideration of market concentration and
application of the Guidelines presumption of competitive harm. We also
examined the transaction's likely anticompetitive effects, and are
satisfied that there is sufficient evidence to support the issuance of
our complaint and proposed consent order.\7\ As noted above, we are
particularly concerned that the transaction is likely to enhance the
potential for coordination.\8\ As set forth in the Guidelines, the
Commission is likely to challenge a merger under a coordinated effects
theory if: ``(1) The merger would significantly increase concentration
and lead to a moderately or highly concentrated market; (2) that market
shows signs of vulnerability to coordinated conduct [ ]; and (3) the
[Commission has] a credible basis on which to conclude that the merger
may enhance that vulnerability.'' \9\ We have reason to believe that
all three factors are satisfied here.\10\
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\7\ The investigation in this matter did not proceed to a full
phase because the parties proposed a remedy soon after second
requests had been issued. Consequently, the quantum of evidence is
not the same as if the agency had completed a full-phase
investigation. But that does not mean, as Commissioner Wright
suggests, that we are lowering our reason-to-believe standard when a
remedy is proposed during the course of an investigation. Wright
Dissent at 9. We believe our complaint is well supported and meets
the same reason-to-believe standard we always apply. We simply do
not think it would have been appropriate to subject the parties to
the added expense and delay of a full-phase investigation. It would
not have been a good use of Commission resources either.
\8\ Although coordinated effects is the primary basis upon which
we found reason to believe that the proposed transaction violates
Section 7 of the Clayton Act, we also found evidence of unilateral
effects, namely, that in the past, customers have solicited
competing bids from ZF and TRW to obtain better prices, and have
switched between ZF and TRW as their preferred supplier.
\9\ Merger Guidelines Sec. 7.1.
\10\ 15 U.S.C. 45(b) (2013).
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First, as noted above, the proposed transaction results in a highly
concentrated relevant market.\11\ Second, the market is susceptible to
coordinated conduct, as evidenced by several recent cases of collusion
in the auto parts industry.\12\ Third, by reducing the number of
significant competitors to only two, the merger would decrease the
impediments to reaching common terms of coordination and make it easier
to monitor compliance with, and retaliate against potential deviation
from, a coordinated scheme. Specifically, as remaining duopolists with
nearly equal shares (41% and 58%, respectively), the combined firm and
Urresko would have greater incentives to take advantage of a market
with relatively few customers that purchase homogeneous products
through individual purchase orders rather than long-term supply
contracts. They would also find it easier to divide customers and
monitor their allocations.
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\11\ See Shapiro, supra note 4, at 708 (``In particular, as the
revised Guidelines explain, the Agencies place considerable weight
on HHI measures in cases involving coordinated effects.'').
\12\ Among the Antitrust Division's recent prosecutions of
companies and individuals in the automotive parts industry for
price-fixing and bid-rigging is an indictment involving TRW in an
alleged conspiracy for seat belts, air bags, and steering wheels.
See Plea Agmt., United States v. TRW Deutschland Holding GMBH, Crim.
No. 12-20491 (E.D. Mich. Sept. 25, 2012), available at http://www.justice.gov/atr/cases/f287600/287657.pdf. See generally Merger
Guidelines Sec. 7.2 (``Previous collusion or attempted collusion in
another product market may also be given substantial weight if the
salient characteristics of that other market at the time of the
collusion are closely comparable to those in the relevant
market.'').
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Our concern that the merger may enhance the relevant market's
vulnerability to coordination is backed by the well-accepted view that
markets with only two or three firms are more conducive to
anticompetitive outcomes than markets with four or more firms.\13\ The
proposed merger would eliminate a third competitor and create greater
symmetry between the two remaining firms.
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\13\ See Salop; Huck et al.; Bresnahan & Reiss, supra note 5.
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Additionally, there is no evidence that fringe competitors, which
have higher prices, or new entrants, which are unlikely to materialize,
could disrupt any coordination between the combined firm and Urresko.
For these reasons, we have ample basis to conclude that the merger may
enhance the vulnerability to coordinated effects that already exists in
the relevant market.\14\
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\14\ See Merger Guidelines Sec. 7.1 (recognizing that ``the
risk that a merger will induce adverse coordinated effects may not
be susceptible to quantification or detailed proof''). The
Guidelines contemplate that the third factor can be satisfied in
several ways; as Commissioner Wright himself notes, an acquisition
of a maverick firm is but ``one illustrative example of the type of
evidence that would satisfy this third condition.'' Wright Dissent
at 3.
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As we noted above, the parties have chosen to address our limited
competitive concerns in the heavy vehicle tie rods market through a
proposal to divest TRW's linkage and suspension business in North
America and Europe. This allows the parties to address our competition
concerns, as well as those of the European Commission. The EC has
already

[[Page 27958]]

accepted the proposed settlement and ordered the divestiture of the
European assets.\15\ Furthermore, there is no evidence that the
divestiture of TRW's linkage and suspension business would eliminate
any efficiencies that otherwise might result from the parties' proposed
combination.
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\15\ See Press Release, European Commission, Mergers: Commission
Clears Acquisition of Automotive Components Manufacturer TRW by
Rival ZF, Subject to Conditions (Mar. 12, 2015), available at http://europa.eu/rapid/press-release_IP-15-4600_en.htm.
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In sum, because we have reason to believe that customers and
consumers are likely to suffer a substantial loss of competition as a
result of the proposed transaction, and there are no demonstrated
countervailing efficiencies, we believe the public interest is best
served by accepting the proposed consent order to remedy our
competitive concerns.

Separate Statement of Commissioner Maureen K. Ohlhausen

ZF Friedrichshafen AG/TRW Automotive Holdings Corp.

I voted in favor of issuing for public comment the proposed consent
agreement in this matter. As discussed below, there is sufficient
evidence to provide me with a reason to believe that, absent a remedy,
the transaction is likely to violate Section 7 of the Clayton Act. I
also find that the proposed consent, which is intended to remedy any
such violation, is in the public interest.
Based on the evidence presented to me--including the evidence
discussed in the Analysis to Aid Public Comment and the majority
statement in this matter--I am satisfied that the ``reason to believe''
prong that the Commission must assess in issuing a complaint, including
in the consent context, is met here. It is important to note that the
Commission makes the reason to believe determination before a full
evidentiary and legal record is developed during a trial on the merits,
which suggests that the standard must necessarily be lower than what
the Commission or a court should apply for finding ultimate liability.
Individual Commissioners, of course, have different views on how much
evidence is necessary to satisfy the reason to believe standard.
Unfortunately, there does not appear to be a consensus view on what the
standard requires. I respect Commissioner Wright's view that the
standard was not met for him in this case. For the reasons identified
in the majority statement in this matter, I determined that there is a
credible basis on which to conclude that this merger may enhance the
vulnerability to coordinated effects that already exists in the
relevant market at issue.\1\
---------------------------------------------------------------------------

\1\ See 2010 Horizontal Merger Guidelines Sec. 7.1.
---------------------------------------------------------------------------

I further view this consent to be in the public interest. In my
time as a Commissioner, I have advocated for transparency,
predictability, and fairness across a variety of settings.\2\ Those
three critical goals apply equally to the merger context. A practical
problem in our merger review process arises, however, where
investigations are cut short by the merging parties, which, for
business, strategic, or other reasons, offer staff and then ultimately
the Commission a proposed remedy in lieu of responding to a Second
Request or other compulsory process. In such cases, the available
evidence may be sufficient to provide reason to believe the proposed
transaction would violate Section 7, but a full investigation might (or
might not) reveal additional evidence sufficient to counterbalance the
available evidence and support closing the investigation altogether. In
that situation, the goals of predictability and fairness counsel
against forcing merging parties (and Commission staff) to incur the
significant costs associated with a full-phase investigation. Merging
parties also expend non-trivial amounts of time and money in developing
and then proposing remedies to FTC staff; those good-faith efforts--
particularly ones that involve coordination of remedies across
antitrust jurisdictions--should not be discounted. The public interest
analysis thus should take into account the need for predictability and
fairness for merging parties in these circumstances.
---------------------------------------------------------------------------

\2\ Those settings have included the use of disgorgement in
competition cases, the proper scope of our standalone Section 5
authority, the intersection of intellectual property and antitrust,
and the treatment of U.S. businesses by foreign antitrust
jurisdictions. See, e.g., Dissenting Statement of Commissioner
Maureen K. Ohlhausen, In re Cardinal Health, Inc., FTC File No. 101-
0006 (Apr. 17, 2015), available at https://www.ftc.gov/public-statements/2015/04/dissenting-statement-commissioner-maureen-k-ohlhausen-cardinal-health-inc (dissenting from consent involving
disgorgement of profits for alleged Section 2 violation); Maureen K.
Ohlhausen, Section 5 of the FTC Act: Principles of Navigation, 2 J.
Antitrust Enforcement 1 (2014), available at http://www.ftc.gov/public-statements/2013/10/section-5-ftc-act-principles-navigation-0
(advocating for additional guidance on the FTC's use of its
standalone Section 5 authority); Dissenting Statement of
Commissioner Maureen K. Ohlhausen, In re Motorola Mobility LLC &
Google, Inc., FTC File No. 121-0120 (Jan. 3, 2013), available at
https://www.ftc.gov/public-statements/2013/01/statement-commissioner-maureen-ohlhausen-0 (dissenting from consent involving
standalone Section 5 claim against holder of standard-essential
patents); Testimony of Commissioner Maureen K. Ohlhausen, ``The
Foreign Investment Climate in China: U.S. Administration
Perspectives on the Foreign Investment Climate in China,'' before
the U.S.-China Economic and Security Review Commission (Jan. 28,
2015), available at https://www.ftc.gov/public-statements/2015/01/testimony-commissioner-maureen-k-ohlhausen-hearing-foreign-investment (discussing importance of foreign antitrust jurisdictions
pursuing the goals of predictability, transparency, and fairness).
---------------------------------------------------------------------------

Dissenting Statement of Commissioner Joshua D. Wright

In the Matter of ZF Friedrichshafen AG and TRW Automotive Holdings
Corp.

The Commission has voted to issue a Complaint and Decision & Order
against ZF Friedrichshafen AG (``ZF'') to remedy the allegedly
anticompetitive effects of ZF's proposed acquisition of TRW Automotive
Holdings Corp. (``TRW''). I respectfully dissent because the evidence
is insufficient to provide reason to believe ZF's acquisition will
substantially lessen competition for heavy vehicle tie rods sold in
North America. In particular, I believe the Commission has not met its
burden to show that the acquisition will result in an increased
likelihood of harm from coordinated effects or from unilateral effects.
As a consequence, the Commission should close the investigation and
allow the parties to complete the proposed transaction without imposing
a remedy.
I write separately today to explain my vote and to discuss the
quality and quantity of evidence necessary to support a coordinated and
unilateral effects challenge under the 2010 Horizontal Merger
Guidelines (``Merger Guidelines'').
The Complaint alleges the proposed transaction increases the
likelihood of coordinated effects and unilateral effects in the market
for heavy vehicle tie rods sold in North America.\1\ After the proposed
transaction, ZF and TRW would have a combined 41% share. The remaining
competitor, Urresko, has a 58% share. Fringe suppliers have a 1% share.
---------------------------------------------------------------------------

\1\ Compl. ] 12, ZF Friedrichshafen AG, FTC File No. 141-0235
(May 5, 2015).
---------------------------------------------------------------------------

I. Coordinated Effects Are Unlikely in the Relevant Market

The Complaint implicates an important question with regard to
coordinated effects: What evidence is necessary to establish reason to
believe a proposed transaction may substantially lessen competition by
``enabling or encouraging post-merger coordinated interaction among
firms in the relevant market that harms customers.'' \2\
---------------------------------------------------------------------------

\2\ U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger
Guidelines Sec. 7 (2010) [hereinafter Merger Guidelines].

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[[Page 27959]]

The Merger Guidelines offer three conditions that, if satisfied,
suggest the agency is likely to challenge a merger upon the basis that
it will result in an increased likelihood of competitive harm from
coordination. The Merger Guidelines specify that the agencies are
likely to challenge a merger if: (1) ``the merger would significantly
increase concentration and lead to a moderately or highly concentrated
market;'' \3\ (2) the ``market shows signs of vulnerability to
coordinated conduct;'' \4\ and (3) ``the Agencies have a credible basis
on which to conclude that the merger may enhance that vulnerability.''
\5\
---------------------------------------------------------------------------

\3\ Id. Sec. 7.1.
\4\ Id.
\5\ Id.
---------------------------------------------------------------------------

The second and third conditions are at issue here and worthy of
further discussion.
The record evidence is mixed with respect to the second condition,
whether the market shows signs of vulnerability to coordinated conduct.
Evidence that the market is generally conducive to coordinated
interaction includes the fact that heavy vehicle tie rods are fairly
homogeneous goods and are purchased using relatively short-term
contracts.
Also potentially germane to assessing the vulnerability of the
relevant market to coordinated conduct are previous episodes of
coordination by the same players in different markets. In 2012, a
German subsidiary of TRW Automotive, TRW Deutschland Holding GmbH, pled
guilty to a conspiracy to fix prices of seatbelts, airbags, and
steering wheels sold to two German automobile customers for vehicles
manufactured or sold in the United States.\6\ While this prior episode
does not involve the same relevant product or geographic markets as the
current matter, it might suggest some vulnerability to coordination.\7\
---------------------------------------------------------------------------

\6\ Plea Agreement ] 4(e)-(f), United States v. TRW Deutschland
Holding GmbH, No. 2:12-cr-20491-GCS-PJK (E.D. Mich. Sept. 25, 2012).
\7\ The Merger Guidelines state that ``The Agencies presume that
market conditions are conducive to coordinated interaction if firms
representing a substantial share in the relevant market appear to
have previously engaged in express collusion affecting the relevant
market,'' but that prior ``express collusion in another geographic
market will have the same weight if the salient characteristics of
that other market at the time of the collusion are comparable to
those in the relevant market,'' and that prior collusion ``in
another product market may also be given substantial weight if the
salient characteristics of that other market at the time of the
collusion are closely comparable to those in the relevant market.''
Merger Guidelines, supra note 2, Sec. 7.2. Thus, I am comfortable
with concluding the prior TRW Deutschland price-fixing case is
material to our investigation, and that this evidence increases the
likelihood of coordination, all things equal. However, without a
more detailed assessment of any logical connection between the
markets where collusion actually took place and the relevant market
here, I am hesitant to give this factor alone substantial weight
given observable differences between the markets. For instance, in
the markets at issue in that case, the bidding process appeared to
be more formal with longer commitments. See Information ] 8, United
States v. TRW Deutschland Holding GmbH, No. 2:12-cr-20491-GCS-PJK
(E.D. Mich. July 30, 2012).
---------------------------------------------------------------------------

There are other considerations, however, that indicate the market
for heavy vehicle tie rods is not particularly vulnerable to
coordination. First, while the product might be fairly homogeneous,
there are significant switching costs including the time and cost
involved with validation testing of the new supplier's tie rods. All
else equal, significant switching costs make markets less vulnerable to
coordination because they diminish firms' ability to punish effectively
deviations from the coordinated price. Second, cost and demand
fluctuations appear to be relatively frequent and large, which increase
the information costs needed to detect accurately deviations.\8\ Third,
Urresko is a relatively recent entrant and has become the largest
supplier in the market. These types of disruptive market events are
generally not conducive to successful coordinated interactions.
Finally, there are a number of large buyers, which can result in
dramatic market share swings if a supplier loses the majority of a
buyer's business. While the record evidence with respect to
vulnerability of the relevant market is certainly mixed at best, it
would not be unreasonable to find the second prong in the Merger
Guidelines satisfied.
---------------------------------------------------------------------------

\8\ For instance, the primary input to produce heavy vehicle tie
rods is steel. Looking at the producer price index for steel mill
products, the average annual price change over the past ten years is
1.6% with a standard deviation of 6.6%. Some of the specific yearly
changes are substantial, e.g., -8.6%, 7.5%, 9.1%, 12.8%. Producer
Price Index--Metals and Metal Products, U.S. Bureau of Labor
Statistics, http://www.bls.gov/regions/mid-atlantic/data/ProducerPriceIndexMetals_US_Table.htm (last visited May 8, 2015).
---------------------------------------------------------------------------

Ultimately, however, I do not have reason to believe the proposed
transaction is likely to result in coordinated effects because the
record evidence does not satisfy the third condition--that is, there is
no ``credible basis on which to conclude that the merger may enhance''
any pre-merger vulnerability to coordination.
The Merger Guidelines provide the acquisition of a maverick firm as
one illustrative example of the type of evidence that would satisfy
this third condition. There is no evidence that either ZF or TRW is a
maverick firm as contemplated by the Merger Guidelines.
The sole evidence offered in favor of the proposition that the
proposed transaction will enhance the market's vulnerability to
coordination is that the merger will reduce the number of firms in the
relevant market from three to two. I do not agree that a reduction of
firms from three to two, without more, is enough to provide ``a
credible basis to conclude that the merger may enhance that
vulnerability.'' The observation that a market with N firms will, after
the merger, have N-1 firms, is simply insufficient without more to
establish the required credible basis under the Merger Guidelines. This
is true even when a merger reduces the number of firms from three to
two. The Commission offers no explanation as to why the Merger
Guidelines would go through the trouble of requiring a credible basis
to believe a merger will change the market's competitive dynamics that
enhances the market's vulnerability to coordinated conduct, in addition
to an increase in market concentration, in order to substantiate a
coordinated effects merger challenge if the latter were considered
sufficient to satisfy both elements.\9\
---------------------------------------------------------------------------

\9\ The Commission cites Carl Shapiro to support the proposition
that market concentration is relevant to coordinated effects
analysis. See Statement of the Federal Trade Commission 2 n.4, ZF
Friedrichshafen AG, FTC File No. 141-0235 (May 8, 2015) (quoting
Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog
to Fox in Forty Years, 77 Antitrust L.J. 701, 708 (2010) (``In
particular, as the revised Guidelines explain, the Agencies place
considerable weight on HHI measures in cases involving coordinated
effects.'')). I agree. The 2010 Merger Guidelines establish market
concentration as one of three conditions that must be satisfied to
find coordinated effects. What Shapiro does not state, and the
proposition the Commission does not otherwise substantiate, is that
evidence of changes in market concentration is sufficient to satisfy
the third condition along with the first.
---------------------------------------------------------------------------

As I have stated previously, ``there is no basis in modern
economics to conclude with any modicum of reliability that increased
concentration--without more--will increase post-merger incentives to
coordinate. Thus, the Merger Guidelines require the federal antitrust
agencies to develop additional evidence that supports the theory of
coordination and, in particular, an inference that the merger increases
incentives to coordinate.'' \10\ Janusz Ordover, in a leading treatment
of the economics of coordinated effects, similarly explains that ``It
is now well understood that it is not sufficient when gauging the
likelihood of coordinated effects from a merger to simply observe that
because the merger reduces the number of firms, it automatically
lessens the coordination problem facing the firms and enhances

[[Page 27960]]

their incentives to engage in tacit collusion; far from it.'' \11\ The
required additional evidence needed to satisfy the third condition is
absent in this case.
---------------------------------------------------------------------------

\10\ Dissenting Statement of Commissioner Joshua D. Wright 3,
Fidelity National Financial, Inc., FTC File No. 131-0159 (Dec. 23,
2013).
\11\ Janusz A. Ordover, Coordinated Effects, in 2 Issues in
Competition Law and Policy 1359, 1367 (ABA Section of Antitrust Law
2008) (``It is quite clear . . . that a reduction in the number of
firms and concomitant increases in concentration do not necessarily
make collusion inevitable or even more likely, stable, or
complete.'').
---------------------------------------------------------------------------

II. Unilateral Effects Are Unlikely in the Relevant Market

The sole evidence offered in favor of the Commission's allegation
that the merger will render unilateral price effects likely is that
some customers have used the competition between ZF and TRW to obtain
better pricing and some customers have switched between the two
suppliers.\12\ While this is certainly material to our inquiry, this is
a thin reed, without more, upon which to base a unilateral price
effects case. There is no information on price effects. Moreover, there
is no substantial evidence on the record with respect to the role the
market leader, Urresko, plays in disciplining prices. The fact that
Urresko is a recent entrant and has become the market leader in a
relatively short period of time also renders dubious the proposition
that barriers to entry in the relevant market are adequate to sustain a
post-merger price increase. Additionally, even with sufficient
barriers, Urresko's rapid growth undermines significantly any
unilateral effects argument and suggests a post-merger price increase
from a merged ZF-TRW would be fragile and potentially unsuccessful. The
Merger Guidelines contemplate the possibility of intense competition in
markets with small numbers of firms, observing that ``Even a highly
concentrated market can be very competitive if market shares fluctuate
substantially over short periods of time in response to changes in
competitive offerings.'' \13\
---------------------------------------------------------------------------

\12\ See Analysis of Agreement Containing Consent Order to Aid
Public Comment 2, ZF Friedrichshafen AG, FTC File No. 141-0235 (May
5, 2015).
\13\ Merger Guidelines Sec. 5.3, supra note 2.
---------------------------------------------------------------------------

Moreover, unilateral effects in a homogeneous goods market
principally involve reductions in output.\14\ In order to be
profitable, the reduction in output must not be met by a sufficient
supply response by rivals. Thus, absent meaningful capacity
constraints, unilateral effects are less likely in homogeneous goods
markets. I have seen no evidence that Urresko is capacity constrained.
---------------------------------------------------------------------------

\14\ See id. Sec. 6.3.
---------------------------------------------------------------------------

III. Conclusion

The Commission insists that a different ``lens'' should be used to
evaluate evidence in markets where the number of firms is reduced by
merger to three or two.\15\ The Commission cites in support of its
structural theory and presumption three academic articles written by
economists.\16\ Only two offer economic evidence and the proffered
substantiation fails to support the claim. The first is an important
early entrant into the static entry literature examining the
relationship between market size and the number of entrants in a
market, focusing upon isolated rural markets.\17\ It strains credulity
to argue that Bresnahan and Reiss's important analysis of the impact of
entry in markets involving doctors, dentists, druggists, plumbers, and
tire dealers in local and isolated areas, where they find the
competitive benefits of a second competitor are especially important,
apply with generality sufficient to support a widely applicable
presumption of harm based upon the number of firms. Indeed, the authors
warn against precisely this interpretation of their work.\18\
---------------------------------------------------------------------------

\15\ See Statement of the Federal Trade Commission, supra note
9, at 2.
\16\ Id. at 2 n.5.
\17\ Timothy F. Bresnahan & Peter C. Reiss, Entry and
Competition in Concentrated Markets, 99 J. Pol. Econ. 977 (1991).
While Bresnahan and Reiss is an important early contribution to the
static entry literature, it cannot possibly bear the burden the
Commission wishes to place upon it. Abstracting from the
complexities of market definition was necessary for the researchers
to isolate entry decisions. This is possible when studying the
effects of entry by a second dentist in a town with a population of
less than 1,000, but not in most real-world antitrust applications.
The authors of the study make this point themselves, noting that
``whether this pattern appears in other industries remains an open
question.'' Id. at 1007.
\18\ In earlier research using similar empirical techniques and
data--namely, small rural markets--Bresnahan and Reiss plainly
reject the notion that the findings should inform views of market
structure and competition generally: ``We do not believe that these
markets `stand in' for highly concentrated industries in the sectors
of the economy where competition is national or global.'' Timothy F.
Bresnahan & Peter C. Reiss, Do Entry Conditions Vary Across Markets,
3 Brookings Papers Econ. Activity 833, 868 (1987).
---------------------------------------------------------------------------

The second is a laboratory experiment and does not involve the
behavior of actual firms and certainly cannot provide sufficient
economic evidence to support a presumption that four-to-three and
three-to-two mergers in real-world markets will result in
anticompetitive coordination.\19\ Once again, the authors warn against
such an interpretation.\20\
---------------------------------------------------------------------------

\19\ Steffen Huck et al., Two Are Few and Four Are Many: Number
Effects from Experimental Oligopolies, 53 J. Econ. Behavior & Org.
435 (2004).
\20\ Id. at 436 (``The number of firms is not the only factor
affecting competition in experimental markets. This implies that
there exists no unique number of firms that determines a definite
borderline between non-cooperative and collusive markets
irrespective of all institutional and structural details of the
experimental markets.'').
---------------------------------------------------------------------------

Finally, the Commission cites a draft article, authored by Steve
Salop, in support of its view that economic evidence supports a
presumption that four-to-three and three-to-two mergers are
competitively suspect.\21\ The article does not purport to study or
provide new economic evidence on the relationship between market
structure and competition. Thus, it cannot support the Commission's
proposition.\22\ In sum, there is simply no empirical economic evidence
sufficient to warrant a presumption that anticompetitive coordination
is likely to result from four-to-three or three-to-two mergers.
---------------------------------------------------------------------------

\21\ Steven C. Salop, The Evolution and Vitality of Merger
Presumptions: A Decision-Theoretic Approach (Georgetown Law Faculty
Publications and Other Works, Working Paper No. 1304, 2014),
available at http://scholarship.law.georgetown.edu/facpub/1304/.
\22\ Nevertheless, to the extent Salop argues in favor of legal
presumptions in merger analysis, he clarifies that they ``obviously
should be based on valid economic analysis, that is, proper economic
presumptions,'' which should be updated ``based on new or additional
economic factors besides market shares and concentration.'' Id. at
37, 48. I agree. Additionally, Salop explains that ``[c]ontemporary
economic learning suggests that concentration be considered when
undertaking competitive effects analysis--in conjunction with other
factors suggested by the competitive effects theory--but not treated
as the sole determinant of post-merger pricing.'' Id. at 13-14.
Notably, Salop does not endorse a distinction between four-to-three
mergers or three-to-two mergers and mergers in less concentrated
markets that justifies a presumption that the former are
anticompetitive; rather, he merely observes that empirical evidence
and economic theory do not warrant ``ignoring market shares and
concentration in merger analysis.'' Id. at 12 (emphasis in
original).
---------------------------------------------------------------------------

It is important to note that the Commission and I have no
disagreement over the proposition that the number of competitors within
a market is a relevant fact to assess the likely competitive effects of
a transaction. The relevant question is not whether the number of firms
matters but how much it matters--and in particular, whether a movement
to three or two firms warrants a generally applicable presumption that
a transaction is more likely than not to harm competition. I do not
believe it does. The Commission disagrees.
The Merger Guidelines make clear that the purpose of market
concentration and market shares associated thresholds ``is not to
provide a rigid screen to separate competitive benign mergers from
anticompetitive ones, although high levels of concentration do raise
concerns.'' \23\

[[Page 27961]]

Rather concentration is but one aspect of the inquiry aimed at better
understanding post-merger incentives to compete. The predictive power
of market share and market concentration data is informed by economic
theory and available empirical evidence. There is no empirical evidence
sufficient to establish a generally applicable presumption that mergers
that reduce the number of firms to three or two are likely to harm
competition.\24\ Further, the Commission's reliance upon such shorthand
structural presumptions untethered from empirical evidence subsidize a
shift away from the more rigorous and reliable economic tools embraced
by the Merger Guidelines in favor of convenient but obsolete and less
reliable economic analysis.
---------------------------------------------------------------------------

\23\ Merger Guidelines, supra note 2, Sec. 5.3.
\24\ See Statement of Commissioner Joshua D. Wright 3-5, Holcim
Ltd., FTC File No. 141-0129 (May 8, 2015).
---------------------------------------------------------------------------

This is not to say that evidence of changes in market structure
cannot ever warrant such a presumption. It does when the evidence
warrants as much. The Commission has in certain contexts found reason
to believe competition would be substantially lessened based simply
upon a reduction of firms in the relevant market. See Actavis plc-
Forest Laboratories \25\ and also Akorn-Hi-Tech Pharmacal,\26\ which
both involve generic pharmaceutical markets. The Commission was able to
draw conclusions about the relationship between price and the number of
firms in generic pharmaceutical markets because substantial research
has been done to establish that such a relationship exists.\27\ Indeed,
the cases in the pharmaceutical industry are the exceptions that prove
the rule that the Commission needs to do more than count the number of
firms in a market to have reason to believe a substantial lessening of
competition is likely. No such research has been done in this market.
Accordingly, unlike in generic pharmaceutical markets, we have no
evidence to conclude that a simple reduction in the number of firms in
this market is likely to lead to higher prices and lower output. Simply
assuming such a relationship exists in this market without any evidence
to suggest that it does harkens back to the bad old days of the first
half of the 20th century, when the structure-conduct-performance
paradigm was in vogue.
---------------------------------------------------------------------------

\25\ Analysis of Agreement Containing Consent Orders to Aid
Public Comment 2, Actavis plc, FTC File No. 141-0098 (June 30, 2014)
(``In generic pharmaceutical product markets, price generally
decreases as the number of generic competitors increases.
Accordingly, the reduction in the number of suppliers within each
relevant market would likely have a direct and substantial
anticompetitive effect on pricing.'').
\26\ Analysis of Agreement Containing Consent Orders to Aid
Public Comment 3, Akorn Enterprises, Inc., FTC File No. 131-0221
(Apr. 14, 2014) (``In generic pharmaceuticals markets, price is
heavily influenced by the number of participants with sufficient
supply.'').
\27\ See David Reiffen & Michael R. Ward, Generic Drug Industry
Dynamics, 87 Rev. Econ. & Stat. 37 (2005). As an aside, given that
we are now ten years removed from the publication of this important
study and over twenty years removed from the sample period, it might
be worth revisiting this question with fresher data if the
Commission intends to continue relying upon inferences of
competitive harm from market structure in the generic pharmaceutical
market.
---------------------------------------------------------------------------

To summarize, there are three-to-two mergers that give rise to
unilateral effects, and three-to-two mergers that give rise to
coordinated effects. It is our burden to show that this three-to-two
merger is likely anticompetitive. The Commission must find sufficient
evidence to support an inference of likely economic harm to consumers.
The heavy degree of reliance upon a structural presumption in this case
is not sufficient to do so.
Finally, the Commission and Commissioner Ohlhausen each claim that
the quantity, and presumably the quality, of the evidence is not the
same for investigations truncated by remedy proposals compared to cases
where a full phase investigation is completed or compared to a
completed trial, respectively.\28\ While this observation is an
accurate description of the pragmatic reality of conducting law
enforcement investigations, I do not agree with the implication that
the quantum and quality of evidence needed to satisfy the ``reason to
believe'' standard should turn on whether and when a remedy proposal is
offered during an investigation. The idea is that we should ``take into
account the need for predictability and fairness for merging parties in
these circumstances'' \29\ and considerations whether it is
``appropriate to subject the parties to the added expense and delay of
a full phase investigation.'' \30\ I fully support the agency
identifying opportunities to lower the administrative costs of
antitrust investigations and believe there to be ample opportunity to
do so. But attempts to operate a more efficient law enforcement system
must satisfy the constraint, required by law, that there is reason to
believe a transaction violates Section 7 of the Clayton Act. That
standard sets a relatively low bar for the minimum level of evidence
required to substantiate a merger challenge. I reject the view that it
should be a standard that should be relaxed because the merging parties
offer a remedy.\31\ The Commission is primarily a law enforcement
agency, albeit one that largely conducts it business by entering into
consents with merging parties. Making the consent process more
efficient and predictable is a laudable goal; but we must not allow
pursuit of a more efficient consent process to distort our evaluation
of the substantive merits. To do so, as in my view we have here, risks
in the long run reducing the institutional capital of the agency in
magnitudes far greater than any potential cost savings from truncating
an investigation.
---------------------------------------------------------------------------

\28\ See Statement of the Federal Trade Commission, supra note
9, at 3 n.7; see also Separate Statement of Commissioner Maureen K.
Ohlhausen 1, ZF Friedrichshafen AG, FTC File No. 141-0235 (May 8,
2015).
\29\ Separate Statement of Commissioner Maureen K. Ohlhausen,
supra note 28, at 2.
\30\ Statement of the Federal Trade Commission, supra note 9, at
3 n.7.
\31\ That said, as I stated in Holcim Ltd., I am not suggesting
the ``reason to believe'' standard ``requires access to every piece
of relevant information and a full and complete economic analysis of
a proposed transaction, regardless of whether the parties wish to
propose divestitures before complying with a Second Request.'' See
Statement of Commissioner Joshua D. Wright, supra note 24, at 11.
---------------------------------------------------------------------------

For these reasons, I cannot join my colleagues in supporting the
consent order because I do not have reason to believe the transaction
violates Section 7 of the Clayton Act nor that a consent ordering
divestiture is in the public interest.

[FR Doc. 2015-11721 Filed 5-14-15; 8:45 am]
BILLING CODE 6750-01-P