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One persistent challenge the United States faces as the COVID-19 outbreak sweeps across the country is a steady shortage of critical medical products. Just as hospitals are growing desperate to secure them—and likely weeks before U.S. coronavirus cases peak—imports of masks, gowns, gloves, and ventilators have fallen by more than 30 percent. Antibiotics are also at risk: Almost 90 percent of the pre-drug chemicals used to make U.S. drugs are made abroad, especially in India and China. Doctors are reporting shortages of drugs used to maintain patients on ventilators. Drug imports are already sliding, and more shortages may be on the way.
As more and more horror stories of hospital shortages are reported, one thing is becoming clearer by the day: Lax antitrust enforcement has made the tragedy more painful. In recent years, antitrust regulators failed to stop a series of acquisitions that increased the risk of systemic supply shortages. These mergers boosted just-in-time supply chains and weakened manufacturing capacity, rendering both of them disastrously fragile in the face of this pandemic.
For decades, companies sold regulators on the idea that factory closures and layoffs are a reason to permit mergers between rivals. Firms argued, often with little evidence, that these cost-cutting measures would trickle down into price cuts to customers.
The agencies tasked with supervising mergers, the Department of Justice and the Federal Trade Commission, invited these arguments under Republican and Democratic administrations. In guidance released under President Barack Obama, the agencies said that consolidating factories is among the best ways to show that an otherwise harmful merger is actually good for consumers. In January, the agencies under President Donald Trump sounded a similar note, saying that they look favorably on mergers that “streamline production, inventory management, or distribution.”
This streamlining is now having real and painful effects. Take the Israeli generic drugmaker Teva, which in 2015 paid $41 billion to buy its rival, Ireland-based Allergan generics. The deal combined the first and third largest generic pharmaceutical companies by U.S. sales, and left more than a fifth of generic drug sales in the country in Teva’s hands. The merger was premised, in large part, on reducing manufacturing capacity. Teva argued that it would save billions of dollars each year by eliminating “duplication and inefficiencies on a global scale,” including in manufacturing and general operations. The FTC permitted the merger on the condition that the merging firms sell off about 80 drug lines, out of hundreds the companies produced.
But the FTC attached no conditions curtailing Teva’s ability to cut back on manufacturing. On that score, the drugmaker did exactly what it promised. Within two years of closing the deal, Teva announced plans to shutter half of its factories, slash the number of drugs it produces, and raise prices on its remaining therapies. These exits had real consequences: The U.S. Government Accountability Office found that a decrease in suppliers over the prior two years is the single most important variable in explaining drug shortages. In July, just months before the COVID-19 pandemic struck, Teva stopped production of dexmedetomidine, a drug used to manage patients on ventilators. Doctors are now scrambling to get their hands on the sedative, which is increasingly difficult to secure.
The severe shortage of ventilators in the United States can also be traced in part to a single anticompetitive merger. As the New York Times and ProPublica reported last week, in 2010 Newport Medical Instruments contracted with the U.S. government to produce cheap, mobile ventilators whose production could be quickly ramped up in the face of a pandemic. Two years later, Newport was on track and ready to file for market approval within a year.
But in mid-2012, the ventilator-manufacturer Covidien bought its smaller rival and killed the government-backed ventilator program. It took years for the government to line up a new producer, which is due to deliver the promised ventilators in mid-2020—too late to address the current COVID-19 surge.
This is not only a problem in the age of COVID-19. Recent research shows that single firms routinely cause and transmit risk, leading to economywide problems. Economists Mary Amiti and David Weinstein, for example, studied the effects of idiosyncratic banking shocks in Japan. The study asked how much year-to-year change in lending and investment could be explained by seemingly random events—such as the Mizuho Financial Group trader who sold 610,000 shares for one yen rather than selling one share for 610,000 yen. They found that about 35 percent of annual changes in lending between 1990 and 2010 can be explained simply by these strange, company-specific shocks. Xavier Gabaix has found similar results in the United States—about a third of the change in economic output year to year is the result of the company-specific booms and busts of the 100 largest U.S. companies.
Mergers that increase the public’s reliance on a given company—like Teva’s combination with Allergan generics, or Covidien’s purchase of Newport—therefore increase systemic risk, the risk that a single failure can lead to systemic harm. Mergers and acquisitions play a central role in organizing the corporations whose size and connections dictate the course of our economy, and our lives. And yet the antitrust enforcers who supervise these deals pay little heed to their effect on systemic risk.
The antitrust agencies can and should consider systemic risk when evaluating new mergers, as I argue in a new paper. This would require several changes. First, the agencies should use new economic prediction tools, including measures of how central the merging firms are to the economy and to their trading partners. The DOJ and FTC already use heuristics to predict how a merger will affect price—they should do the same to make predictions about systemic risk. Second, the agencies should weigh the serious costs to the public, not just the benefits, of cost-cutting efficiencies such as factory closures and supply-chain streamlining. And third, when devising conditions for merger approvals, the agencies should consider systemic risk. The agencies could, for example, require merging companies to sell business lines in order to decrease their trading partners’ dependence on a single firm.
It may be too late for competition law to play a significant role in combatting COVID-19. But it is not too early to rethink our approach to antitrust merger review in light of the pandemic—and to protect against consolidation happening right now. As these last few months show us all too clearly, market structure and merger policy can become a matter of life and death overnight.
