The Reagan administration has achieved its major antitrust goal of establishing "economic efficiency" as the key for evaluating mergers, according to Assistant Attorney General J. Paul McGrath, chief of the Justice Department's antitrust division.
The aim of "economic efficiency" is to allow the market to "produce the mix of goods that consumers want -- at the lowest cost," McGrath said.
And if mergers -- even among some of the largest companies within an industry -- help improve the mix, the government should not stand in the way, he said.
The "efficiency" doctrine, which is adhered to by conservative economists and lawyers in key policy positions in the Reagan administration, is a far cry from the liberal antitrust philosophy of the past.
Many of McGrath's predecessors took a suspicious view of mergers -- particularly by firms in the same industry -- fearing that reducing the number of competitors would be detrimental to customers. Their goal was to maintain a healthy number of competitors in each industry.
But, McGrath said, "the only goal of antitrust is economic efficiency. Any other approach is bad economics, or bad law and bad policy. We are not unconcerned with small business and workers' jobs. But we believe an efficient economy will lead to the creation of new businesses and new jobs."
McGrath, who was interviewed last week, leaves office at the end of the month and plans to return to Dewey, Ballantine, a New York law firm, to run the litigation department.
The goal for the second term is to apply the "efficiency" standard to other areas of antitrust policy, he said.
Loosening restraints on patent licensing and removing the treble-damage penalty on some anticompetitive acts are among the tasks left for whoever is named to succeed him, McGrath said.
Under guidelines established in 1968, the Justice Department assumed that concentrating market power in a few corporate hands would lead to collusion. If a proposed merger would exceed a certain level of market concentration, it automatically was challenged, regardless of potential cost efficiencies.
In 1982, the department revised its guidelines for evaluating proposed mergers to allow occasional consideration of potential cost efficiencies and of the role of foreign competition in the affected markets. Last June, McGrath altered the guidelines to state those considerations explicitly. "We look at the market totally differently than they did in the '60s," McGrath said.
This change in philosophy means that the Justice Department takes a more lenient view toward mergers, which would have been inconceivable 20 years ago, he said. For example, the department might allow a combination of two U.S. firms with major shares of a specific market if foreign firms or potential entrants to the industry could maintain a competitive cost structure.
"The central thing that happened in the last four years was the insistence that the rules of the game be consistent with sound economics," said McGrath, a Wall Street lawyer who ran the antitrust division for a year after serving for three years as head of the civil division.
Because of this change in emphasis, people recognize that "antitrust decisions have broad economic ramifications, that antitrust policy is part of our broad economic policy," he said.
That was clear about a year ago when McGrath ignited a verbal firestorm within the administration over his application of the rules to the LTV Corp.-Republic Steel Corp. merger. McGrath blocked the merger as originally proposed, accusing the companies of inflating their estimates of the cost efficiencies to be gained and of exaggerating the role of imported steel in the affected markets.
Commerce Secretary Malcolm Baldrige and U.S. Trade Representative William E. Brock blasted the decision, arguing that mergers in declining industries improve the nation's competitiveness in world trade.
McGrath later approved the $770 million merger of LTV and Republic, the nation's third- and fourth-largest steel firms, after they restructured the deal and agreed to sell two facilities. U.S. Steel Corp. and National Intergroup Inc. were unable to work out a similar compromise and dropped their plans to merge after McGrath said he would block their proposed deal.
"I think I have helped convince people that the economic approach to antitrust is the only one which is acceptable," McGrath said.
This approach also has led to a more lenient view of joint ventures. "The dynamics of international trade have created more situations where joint ventures may be useful, necessary and helpful," he said, citing as examples the combined efforts of General Motors Corp. and Toyota Motor Corp., of National Steel and Nippon Kokan K.K., and of Aluminum Co. of America and Atlantic Richfield Co.
Some joint ventures "are more likely to result in efficiencies and economic advances than in anticompetitive agreements," McGrath said. "As a matter of economic theory . . . as a matter of national industrial planning, we ought to allow business leaders to take part in such ventures."
He said the department does not "bless them all." Antitrust officials try to judge whether a joint venture "is likely to produce something that otherwise would not have been produced as efficiently, whether economic benefits will flow that otherwise would not occur, and then balance that against the risk of price-fixing or collusion of some other troublesome sort."
A similar analysis lay behind the administration's successful push last year for a law that eased antitrust restraints on joint ventures for research and development. Such ventures now are not considered automatic violations of antitrust laws and are judged individually on their competitive effects.
"Factually, it is clear that certain kinds of high-tech R&D will be facilitated through joint ventures," McGrath said. "Thus, there is an economic efficiency there . . . and it should help our consumers if the ventures develop new products."
The antitrust division's "number one priority, chronologically," will be to push for changes in the laws governing the licensing of patented inventions, he said.
Companies should be allowed to enter into licensing agreements, where they receive royalties in exchange for use of the invention, for longer than the 17-year term of a patent, McGrath said. Current law making it an antitrust violation to do so is "economic nonsense," he said.
Two firms may want to cross-license different inventions and might want royalty periods of equal lengths. One firm may have several patents for one process and may want to license the entire group for one period, and "there is no economic reason why they should not be able to do that," McGrath said.
He would retain the penalty for secret price-fixing, but would throw it out for violations of antitrust rules governing joint ventures, licensing and vertical price agreements. "We should examine the consequences of that remedy," McGrath said. "We are the only country in the world with that remedy. Maybe the rest of the word isn't crazy. Maybe the rest of the world realizes it's a form of self-handicap."