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The Lurking Theory of Potential Competition in the DOJ’s JetBlue/Spirit Complaint

Several antitrust commentators have noticed that, despite losing its challenge to block Meta from acquiring the leading maker of VR dedicated fitness apps, the FTC secured a victory for antitrust agencies in the sense that the opinion could rehabilitate the theory of potential competition in blocking future mergers. In full disclosure, I was the FTC’s economist in that challenge, so I won’t comment on the opinion, other than to note that (1) Steve Salop has opined that the court applied an excessive evidentiary burden in assessing Meta’s de novo entry absent the merger, and (2) Herb Hovenkamp has written that “the court made a detailed analysis of all the ways that Meta might have entered on its own, discounting all uncertainties in favor of the defendant.”

To review the bidding, potential competition is the concept that even if two companies are not currently direct competitors, there is a chance that the acquirer would enter the market occupied by the target absent the merger (or vice versa). If the acquirer would have entered with certainty, then permitting the merger harms competition by reducing the number of competitors by one, at least in expectation. Even if acquirer would have entered with some probability less than 100 percent, the mere threat of entry might impose a substantial check on the target’s price-setting power. And in a highly concentrated market, such a reduction in potential competition could lead to substantial competitive effects, including increasing the risk of coordinated pricing. Using pricing data for the merger of USAir and Piedmont, John Kwoka and Evgenia Shumilkina (2010) estimated that prices rose by five to six percent on routes that one carrier served and the other was a potential entrant.

A new tool in the agencies’ toolkit?

Now you won’t find the phrase “potential competition” in the DOJ’s challenge of JetBlue’s acquisition of Spirit. And most press reporting on the case has focused on the loss of actual competition, which would occur wherever JetBlue and Spirit have overlapping routes (150 routes according to the complaint at paragraph 31). Indeed, much has been made of the overlapping routes, such as those connecting Miami/Ft. Lauderdale and Aguadilla (Puerto Rico), where JetBlue and Spirit are on the only carriers providing nonstop service—that is, the merger is a merger to monopoly on those routes.

But the concept of potential competition is lurking in the background of DOJ’s complaint. Consider that paragraph 71 defines one set of relevant markets as “origin-and-destination pairs that JetBlue does not serve but where Spirit currently offers nonstop service or planned to enter with nonstop service as an independent.” In paragraph 34, the complaint asserts the merger would harm competition in “routes where Spirit has plans to start competing with JetBlue in the near future, and vice versa.” And the complaint notes at paragraph 6 that “over the next five years Spirit plans to add nonstop service to several routes JetBlue flies today.” These passages suggest that the DOJ plans to mount an attack on the potential competition hill. Presumably, the DOJ has acquired evidence of JetBlue’s and Spirit’s expansion plans that were hatched prior to the proposed merger. Eliminating a carrier that could expand into new markets is a loss in potential competition.

That potential competition theories are even mentioned in the DOJ’s complaint is noteworthy because prior DOJ merger cases haven’t spent much time there. And I’m not aware of consent decrees addressing the loss in potential competition. Indeed, in the go-go days of non-enforcement from Reagan to Obama, many decrees did not even care about actual overlap in city pairs when there were alleged out-of-market efficiencies.  

A feckless remedy for harms to potential competition

Merging parties are quick to offer a remedy that purportedly allays harms from a loss of actual competition—namely, divestitures. In this instant merger, JetBlue has offered to spinoff Spirit’s landing slots in New York, Boston, and Fort Lauderdale. The problem with landing-slot divestitures, as DOJ’s Doha Mekki pointed out in a press conference this week, is that they don’t guarantee a replacement of lost competition on a particular route. In other words, a third party could acquire the landing slot but elect not to serve the formerly overlapping route. And as Darren Bush explained on the latest episode of The Slingshot (minute 58), divestitures of landing slots often go to third parties (approved by the merging firms) that are not capable of replacing the lost competition; a successful airline requires a network of routes to achieve the requisite economies of scope, not just a handful of landing slots.

In contrast, there is no amount of divestiture that can address harms from the loss of potential competition. If JetBlue was reasonable capable of entering a market served by Spirit, the merger will prevent that from happening. If there’s any doubt about its capability to enter new markets, JetBlue entered the Boston-Atlanta route as recently as 2017. And while Spirit allegedly planned to invade certain JetBlue markets, we can’t know which markets would have been invaded. For these reasons, the theory of harm relating to potential competition can be more potent than one based on loss to actual competition, as divestitures are not a cure.

The merging parties might argue that entry by other carriers into the affected city pairs is as easy as pointing the nose of the plane. But airlines fear retaliation from other carriers, so that’s not likely.  And the industry has a history of crushing competitors that try to sneak in under the radar and build presence in city pairs, including via predatory pricing and other capacity shenanigans.

Alas, there is no mention of merger-related worker harms in the DOJ’s complaint, despite the history from prior mergers, such as the combination of US Airways and American West, which took ten years to integrate the union seniority list and faced serious problems protecting the workforce. Divestitures wouldn’t alleviate worker harms either.

Assisting the factfinder on entry probability in the absence of the merger

The assessment of a firm’s likelihood of entry absent a merger is tricky, however, particularly for folks who don’t spend a lot of time thinking about probabilities, let alone conditional probabilities. Let me try this analogy on you: A burglar has learned that you have something very expensive in your basement. Perhaps jewelry, or a collection of rare wines or baseball cards. The burglar is intent on taking your prized possession. Now imagine he tries entering your home by the front door, but the door is bolted. Does he give up? Not if he’s committed to taking what’s yours. Indeed, he will likely case the entire property until he finds an unsecured entry path. This means the probability of entering through say a side window conditional on not being able to enter through any other means is very high.

Consider a scenario where you’ve left the front door open when you went for a dog walk, the burglar tries the front door, and given your carelessness, he walks right in. And here’s the second probability lesson: That the burglar entered the front door says nothing about the likelihood of his entering the back door or window in a world where the front door was bolted shut! The reason is because the two entry pathways are mutually exclusive—once the burglar enters the front door, he will naturally abandon the other pathways. By the same logic, courts should attach zero weight to a defendant having abandoned de novo entry plans after having decided to enter through acquisition.

Let’s hope the factfinder keeps this lesson in mind when evaluating the record evidence of JetBlue’s and Spirit’s entry plans. When assessing the likelihood of de novo entry absent the merger, one must ignore any entry-related evidence after the merger has been hatched, as the merging parties will naturally abandon any plans to invade the other’s markets. There’s a ton of airline consumers depending on the court getting to the right answer.

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