FTC Presents Defense Industry Antitrust Testimony before Senate Armed Services Committee

The Federal Trade Commission has told the Senate Armed Services Committee that vigorous enforcement of antitrust laws is consistent with the goal of preserving a strong national defense in the U.S. In testimony before the Senate Armed Services Committee today, Robert Pitofsky, Chairman of the FTC, said that defense industry mergers can be structured to accommodate industry downsizing while still complying with antitrust laws. Effective antitrust review by the Commission and the Department of Justice protects the Defense Department, and ultimately the American taxpayer, from the risk that a firm or group of firms could exercise market power by raising prices, he said.

Pitofsky was asked to testify as the chairman of the antitrust agency that reviews the majority of proposed mergers of defense firms. He previously chaired the Defense Science Board Task Force on Antitrust Aspects of Defense Industry Consolidations.

"In analyzing a proposed merger, the Commission focuses on one overriding issue: the likelihood that the transaction will harm consumers in any relevant product market through increased prices, lower product quality or service levels, or reduced technological innovation," Pitofsky said.

Pitofsky said that Merger Guidelines jointly issued by the Commission and the Department of Justice establish a framework for merger analysis that is flexible enough to apply to the unique characteristics of defense industry mergers. "Nevertheless, the analysis of defense industry mergers is challenging because of the many special characteristics in that industry. The Defense Department is often the only buyer for the products and services of the merging firms, and its purchasing decisions are conducted in a manner that varies from that found in most industries. The weapons systems being procured are often complex and heterogeneous systems, frequently purchased on a winner-take-all basis, so price fixing conspiracies are hard to maintain. Finally, the Commission must always be cognizant that national security may be implicated in a decision to allow or challenge a transaction."

Pitofsky said that defense industry mergers are examined based on the criteria applied to all mergers: defining product and geographic markets and assessing the impact of the merger on the behavior of those markets; assessing the prospects that others will enter the market; and examining whether the merged entity can exercise market power to increase prices or reduce quality or innovation. The potential that efficiencies resulting from a merger that could lower costs or increase productivity is also reviewed, he said.

"Antitrust policy, including the policy of opposing consolidations that increase the potential for abuse of market power, is designed to apply to all industries," Pitofsky said. "By promoting a competitive economy, the antitrust laws ensure that consumers will receive the best quality, highest performance goods and services at the lowest prices. As the major consumer of defense industry products, the Defense Department seeks the same goals. Vigorous enforcement of the antitrust laws is thus entirely consistent with the goal of preserving a strong national defense," he said.

Copies of the testimony are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov and also from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202-326-2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

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(FTC file No. P859 910)