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Abstract

Merger enforcement today relies on settlements more than litigation to resolve anticompetitive concerns. The impact of settlement policy on welfare and the proper goals of settlement policy are highly controversial. Some argue that gun–shy agencies settle for too little, while others argue that agencies use their power to delay to extract overreaching settlement terms, even when mergers are not welfare reducing. This Article uses decision theory to throw light on this controversy. The goal of this Article is to formulate and analyze agency merger enforcement and settlement commitment policies in the face of imperfect information, litigation costs, and delay risks by the merging parties, agencies, and the courts. The Article explains why limiting the goal of merger enforcement and agency settlement policy simply to avoid welfare harms, but nothing more, is flawed as a matter of both law and policy and would compromise deterrence. The decision–theoretic analysis distinguishes two types of agency commitment policies: a short–run optimal policy that focuses only the specific merger proposal being evaluated and a long–run optimal policy that takes into account effects on future mergers and deterrence goals. The short–run optimal policy may lead to some welfare–reducing settlements by a rationally gun–shy agency; settlement demands for weakly welfare-enhancing merger proposals, what might be called “exacting tribute”; and “anti–deterrence” effects by merging firms proposing some mergers with greater welfare harm in order to increase settlement bargaining leverage. In contrast, a disciplined long–run optimal policy would clear all welfare–enhancing mergers as proposed; forgo negative welfare settlements despite the risk of losing in court, but instead demand settlements on welfare–reducing merger proposals sufficient to lead to strict welfare increases (not just welfare neutrality), relative to no merger; and avoid anti–deterrence by demanding larger settlements for more harmful mergers. While these latter provisions might be controversial as a political matter, they support deterrence. Demanding only welfare–neutral settlements would lead to under–deterrence. Deterrence also would be improved if last–minute voluntary divestiture agreements were not treated as part of the merger agreement evaluated by the court, contrary to the approach taken in Arch Coal and other cases.

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