United States V. H&R Block: An Illustration Of The Doj'S New But Controversial Approach To Market Definition

Sometimes what appears to be a little, almost imperceptible change can have a huge impact on a policy regime. The recently revised Department of Justice and Federal Trade Commission Horizontal Merger Guidelines contain such a change, as the document recognizes the importance of Critical Loss Analysis in defining a market but introduces a theoretical construct to control the analysis. This approach imposes a structure based on the economist's Lerner index and then applies a specific style of diversion analysis to compute the actual loss to a hypothetical price increase. We show that this methodology almost guarantees narrow markets, a change that could support a very significant increase in the level of merger enforcement. However, we also show how this aggressive policy result depends on specific assumptions that are often not justified. Change these assumptions, and the traditional implications of a Critical Loss Analysis are restored. The recent Department of Justice (DOJ) challenge of H&R Block's proposed acquisition of the TaxACT software is used to illustrate the problem. Unjustified theoretical assumptions allowed the DOJ's expert economist to testify to a narrow market that virtually guaranteed that the merger would be found anticompetitive. In effect, theory, if allowed to control market definition analysis, would significantly reduce the plaintiff's burden of proof and expand the potential for merger enforcement.