Potential competition and the Kennecott-Peabody merger : a critical analysis

This study examines the Federal Trade Commission's application of the potential competition doctrine in the Kennecott Copper Corporation and Peabody Coal Company merger case. The Commission's complaint alleged the merger violated Section 7 of the Clayton Antitrust Act by removing Kennecott as a potential entrant in the coal industry. The case is significant in terms of the doctrine's judicial development for two reasons. One is that it was the first invocation of the doctrine in an industry where concentration was relatively low. Second, it was the first application of the doctrine to a pure conglomerate merger. The primary objective of the study is to examine the consistency between these extensions and the economic theory upon which the doc trine is based.

In order to examine the Commission's application of the doctrine in Kennecott, it was necessary to collect a substantial amount of data from the coal industry. These data are used to analyze the structure of the coal industry over the 1954-1977 period. All data are from sources available to the general public.

The study also investigates the rationale between the Federal Trade Commission's and the Tenth Circuit Court of Appeals' reluctance to consider post-litigation—pre-compliance evidence that indicated two vital predictions made by the Commission were inaccurate. The study examines this evidence and finds this reluctance stems from a more general reluctance to consider either competitively neutral or procompetitive post-acquisition evidence in Section 7 cases.

One policy implication of the study is that those responsible for antitrust implementation should exercise more caution in applying the doctrine in those cases where the economic preconditions are not satisfied. Specifically, the economic preconditions tend to restrict the doctrine's applicability in industries where concentration is relatively low as well as in pure conglomerate mergers. A second policy implication is that the judiciary might consider post-acquisition evidence on a case-by-case basis. Basic principles of decision-making under uncertainty suggest a benefit-cost approach to the admissibility of such evidence.