Historical American Antitrust Policy Regarding Horizontal Mergers: The Brown Shoe Case and the Hart-Scott-Rodino Act

Horizontal mergers are mergers between firms engaged in essentially the same kind of business activity - i.e., mergers between firms who are direct competitors. Two key events in the history of American antitrust policy's approach toward horizontal mergers are the Brown Shoe Case, decided in 1962, and the passage of the Hart-Scott-Rodino Act in 1976.

The Brown Shoe Case (1962)

The Brown Shoe Case of 1962 was perhaps one of the least reasonably decided antitrust cases. Brown Shoe Company had proposed to merge with Kinney Shoe Company, another shoe manufacturer. Neither shoe company comprised a significant fraction of the market, and the merger would not have had an important effect on market concentration.

However, the courts blocked the merger, using as their justification the "incipiency precedent," which stated that even if market concentration will not be greatly increased by a horizontal merger, it is still necessary to prevent the merger so as to ensure no further threats to market concentration. The incipiency precedent, in essence, made all horizontal mergers illegal - even though many might not have led to any kind of market power on the part of any firm.

Today's merger guidelines, fortunately, are much less stringent than those that decided the Brown Shoe Case of 1962. The Brown merger with Kinney would have been easily permitted today. Formerly, the CR (concentration ratio) was used to evaluate a proposed merger's effect on market concentration; more recently, the CR has been replaced by the Herfindahl-Hirschman Index (HHI).

The Hart-Scott-Rodino Act (1976)

The Hart-Scott-Rodino Act amended Section 7 of the Clayton Act to require advance notification of the antitrust authorities of at least 30 days in advance of any merger about to take place. Prior to the Hart-Scott-Rodino Act, many firms would go ahead with mergers, and then antitrust authorities would decide to challenge the case and the courts would rule that the merger was illegal - thereby forcing the firms to diverge. This, however, is difficult and costly for the firms to do. By having advance notification of forthcoming mergers, antitrust authorities can tell the firms in advance whether the merger will be challenged, preventing subsequent problems. Compliance with the act is expensive, but authorities claim that it helps with enforcement of the antitrust laws and avoids the costs of splitting merged firms.

Source

Pongracic, Ivan. Lecture on Horizontal Mergers and Armentano's Antitrust: The Case for Repeal. Hillsdale College. Hillsdale, MI. November 29, 2007.

All lecture material is used with explicit permission.