Abstract

U.S. antitrust enforcement agencies have overlooked a significant competition harm: increasing risk. By risk, I mean the expected value of harm to third parties stemming from an unexpected supply or demand shock. Mergers can increase risk (and reduce resilience) both directly to merging parties’ trading partners and to society as a whole. By reducing competition, mergers can influence the odds and importance of key disruptions, such as prescription drug and hospital bed shortages, transportation stoppages, and curtailed credit. There is now powerful evidence that negative shocks to individual firms can harm their trading partners and cascade through society more broadly. But until recently, the agencies ignored risk effects in merger review entirely.

Risk is a natural concern of the antitrust laws. Shortages and supply disruptions reduce output, increase prices, and limit customer choice. For these reasons mergers that increase risk can and often should be blocked under the Clayton Act. To show how the agencies should weigh risk effects, I analyze when and to what degree mergers are likely to change risk. Important factors include market power, customer exposure, firm size, economic centrality, and differentiated production techniques.

The relationship between competition and risk should lead the antitrust agencies to change merger policy in three main ways. First, the agencies should move to block mergers projected to increase risk significantly even when that is a merger’s main or only predicted anticompetitive effect. Mergers that threaten to eliminate firms with idiosyncratic production techniques—production mavericks—are especially concerning on these grounds. Second, the agencies should consider risk when evaluating purported cost-cutting efficiencies, such as closing redundant factories, because achieving such efficiencies may in some cases increase risk. Finally, when exercising investigative and enforcement discretion, the agencies should focus on those mergers that would likely increase systemic risk by creating especially large or economically central firms.