In 30 years as an antitrust enforcer, academic, and consultant on antitrust issues, I have rarely seen a report so fundamentally flawed as the GAO study of several oil mergers that the Federal Trade Commission investigated under my predecessor, Robert Pitofsky. As the Commission unanimously said in its August 2003 letter to the GAO, this report has major methodological mistakes that make its quantitative analyses wholly unreliable; relies on critical factual assumptions that are both unstated and unjustified; and presents conclusions that lack any quantitative foundation. As a result, the report does not meet GAO’s own high standards of “accountability, integrity, and reliability” that one expects from its reports and publications.
Under the chairmanships of Robert Pitofsky and myself, the FTC has aggressively scrutinized the petroleum industry for anticompetitive practices. The FTC has been especially concerned about potential non-competitive behavior in the petroleum industry. Moreover, some oil mergers have a uniquely large number of relevant markets that may be at issue in a particular merger, and thus would require an extraordinary amount of time to confirm that anticompetitive effects are likely to arise. In an effort to accommodate the wishes of those who desire to close quickly, while protecting the public interest in competitive markets, the FTC has consistently required that merging parties bear the risk that relief might be over-inclusive, rather than imposing on the public the risk that relief might be under-inclusive. The data released by the FTC in February of this year demonstrate that the standards the Commission has applied to oil industry mergers are significantly more stringent than those applied to other industries.
Regarding the many problems in the GAO report, the Commission sent a detailed critique to GAO last August. The final report fails to correct these fundamental flaws.
First, the models used still do not adequately control for the many factors that cause prices to increase or decrease. The report ignores changes in gasoline formulation and most supply disruptions, such as those caused by pipeline disruptions or refinery outages. For example, in some cases, the pre- and post-merger periods reviewed are limited to either summer, when the demand for gasoline increases, or winter, when the demand decreases. Not surprisingly, the report found that gas prices increased in summer and decreased in winter. To attribute these results to mergers is simply specious.
Second, the price-concentration methodology used in the report suffers from several well-known problems that make it unacceptable as an alternative to a well-conducted event study. (The FTC staff first identified these problems over 18 months ago, in written comments to the GAO.) The FTC’s Bureau of Economics, in fact, performed such a study examining the effects of the Marthon-Ashland joint venture, comparing a year before the transaction to one and two years after the transaction, and compared to three control markets. Unlike the GAO, this retrospective found no increase in the retail prices of gasoline in Louisville.
Third, any reliable price-concentration analysis necessarily requires that concentration be calculated in an economically well-defined market – that is, an area in which change in concentration is likely to have an economic effect. The report makes conclusions based on the unsupported assumption of state-wide geographic markets in oil merger cases. As the Commission wrote to the GAO:
We are not aware of any supporting empirical data that markets generally coincide with state boundaries. Indeed, all of the data with which we are familiar point to the conclusion that wholesale markets in this industry rarely coincide with state limits. Accordingly, while price-concentration analyses may provide some useful information on general industry trends in concentration, they cannot be used to determine if an economically meaningful relationship exists between price and competition.
Finally, the comments on the August 2003 draft report noted a number of instances where the results were not robust – that is, the results in the final report differ substantially from the results in the draft report using equally plausible models or other specifications of the models. The GAO omitted these alternative results from the final report. The results in the final report appear more robust simply because these alternatives are not reported.
The Commission’s extensive antitrust enforcement since 1996 in the petroleum industry has included the following:
The Federal Trade Commission has been, and remains, committed to protecting consumers from illegal anticompetitive conduct that is likely to result in higher gas prices. The GAO’s conclusion that consolidation in these industries in the 1990s led to decreased competition and higher prices does not survive scrutiny.