Art of the Deal: The Merger Settlement Process at the Federal Trade Commission

This paper models the modern merger review process in which an enforcement agency, here the Federal Trade Commission (FTC), interacts with the acquiring firm to determine the outcome of antitrust regulation. Our empirical implementation of a game theoretic analysis tests whether decisions are driven by the costs and benefits of the proposed enforcement initiative as well as whether firmsʹ responses are colored by competitive and institutional considerations. With respect to firms, the results suggest that mergers are driven by the opportunity to capture efficiencies. In contrast, the structural (anticompetitive) characteristics of mergers do not seem to impact firmsʹ litigation decisions. Firms, however, are deterred from fighting the FTC by the potential negative impact on their reputations. In addition, "hostage effects" associated with the size of the noncontroversial portion of acquisitions held up by the FTCʹs competitive concerns also affect firm decisions.