12/14/98 WHY TRUSTBUSTERS ARE BUSY EVEN WHEN PRICES FALL

WHY TRUSTBUSTERS ARE BUSY EVEN WHEN PRICES FALL

Prices for gasoline and heating oil are near inflation-adjusted 50-year lows. And excess supply continues to flow from all corners of the globe. Yet, there is no doubt--certainly not in the stock market at any rate--that federal trustbusters will take an extra hard look at the proposed combination of Exxon Corp. and Mobil Corp.
The megamerger points up what is becoming a more frequent question for regulators: How do you measure anticompetitive activity and prevent harm to consumers in markets where prices are falling? For the past several years, the Justice Dept. and Federal Trade Commission have struggled with this conundrum. No longer fixating on how companies use market power to raise prices--once the litmus test of antitrust litigation--the agencies now must ask another type of ''what if?'' Would prices be even lower if this merger didn't happen?
Over the past two years, the government has asked that question and concluded that some proposed mergers would impede market forces pushing down prices. The FTC stopped a pair of huge deals in the drug-wholesale business: McKesson Corp.'s plan to acquire AmeriSource Health Corp., and Cardinal Health Inc.'s proposed purchase of Bergen Brunswig Corp. In the office-supply superstore business, it concluded that combining Staples Inc. and Office Depot Inc. would inhibit the fall in prices--even though the companies argued that their greater efficiency would, in fact, accelerate that decline.
THE WINDOWS TEST. The question of how quickly prices drop with or without competition is also at the heart of the Justice suit against Microsoft Corp. In its economic analysis of the software industry, Justice has repeatedly argued that Microsoft's prices would be far lower if it had more direct competition. On Dec. 1, Frederick R. Warren-Boulton, the government's expert witness, testified that the price for Microsoft Windows is ''significantly above 5%'' more than it would have been if Microsoft didn't have 90% of the market. Warren-Boulton, head of a Washington economic consulting firm, argued that while prices of other parts of PCs were falling, the Windows price was an ever larger percentage of the total PC cost. ''We see a really dramatic increase in the cost of the operating system relative to the other components in a PC,'' he said.
How to use the tool now being applied to William H. Gates III, the Rockefeller of the computer era, to Exxon and Mobil--the two largest chunks of Rockefeller's Standard Oil trust? There is no one segment of the oil industry that Exxon Mobil will control to the same extent that Microsoft controls the PC industry. Nor will this giant have anything near the market power of the oil trust that the government broke up in 1911.
But the government will review carefully the ways in which the Exxon-Mobil merger might reduce competition. Experts believe, for instance, that it will ask for divestiture of some ''downstream'' operations--refining and retail sales of gasoline--where the two now compete directly. ''In regions where the two firms have high shares in the retail gas market, that could require some divestitures,'' says Stephen Calkins, professor at Wayne State University Law School. But in exploration and development, where competition is brisk, Justice may not demand anything, despite the combined companies' awesome assets.
One core concern in the Exxon-Mobil union will be whether proposed cost-cutting will keep prices on a downward trend. Even if the agency concludes that crude oil prices are beyond the control of the companies, the FTC will have to decide which would do more to transmit deflationary pressures down to the pump--super-efficient giants or intense competition among more players. This will be a key concern as the Feds review other oil-patch marriages. In the wake of the Exxon-Mobil deal, other combinations are likely. The FTC is already reviewing British Petroleum Co.'s purchase of Amoco Corp.--which is expected to go forward, but with strings.
Those are tricky tasks. But as global competition induces more companies to merge and as deflation takes over more markets, trustbusters will constantly face the pricing question: How low is low enough?
By Susan B. Garland in Washington