How the government will analyze the UFC-Strikeforce Merger

Those are some great points! Because the investigation is nonpublic, it’s impossible for us to know when it began, unless someone at Zuffa or Strikeforce leaks it.

I don’t think this is a Hart-Scott type review, because the firms have to wait to finalize their merger under the HSR framework. Also, as you mentioned, based on the figures I’ve seen, it doesn’t seem to reach the HSR threshold. But, even if it wasn’t, the government could still use the Horizontal Merger Guidelines to analyze the transaction.

The ProElite comments, the PRIDE acquisition and the UFC’s treatment of vendors could all be relevant to an abuse of monopoly position investigation. They wouldn’t relate as much to the Strikeforce acquisition per se, so a lot depends on what kind of investigation the government is conducting (focusing on the UFC-Strikeforce merger or a broader Microsoft-type investigation), which is difficult to know. That being said, abuse of monopoly power cases are much harder to win in court than challenging an anticompetitive agreement (such as a merger).

Like you, I’m also not impressed with the barriers to entry defense. There are huge network effects, because everyone wants to see the best fighters face each other. As Strikeforce found, you can’t just peel off an Emelianenko here or Hendo there and hope to compete on even footing against the UFC.

As you probably know, the government generally doesn’t seek monetary damages in antitrust actions, though their investigation could pave the way for private plaintiffs to seek treble damages in a class action. The government might seek to force the UFC to unwind the merger, which is probably one reason why the UFC is trying to poach as much Strikeforce talent as it can right now.

Great points! Thanks for the feedback—you clearly know your stuff!

thanks for reading and the feedback!

Thanks Tedd! Normally, I’d be concerned about putting so many technical details in an article like this, but I knew that BE readers would be up to it.

Back atcha’, RDL! Thanks for the feedback!

I meant any cases in the antitrust field, if there are any other than mergers. I have no knowledge of this stuff.

Thanks—doing so right now!

I just have to imagine that the trail of destroyed relationships (Affliction, Showtime, EA Sports, Metal Mulisha, Clinch Gear, etc…) in addition to those scorned (MFC, ESPN, HBO, Tapout) will put some good fuel to the fire.

I think your take makes a lot of sense. It seems like Strikeforce, while not a powerhouse, was the UFC’s strongest remaining competitor. The most difficult question would be what kind of remedy to seek. With the UFC having already poached a lot of SF’s best talent, I’m not sure it’d even work as a functioning independent promotion anymore. One solution could be to force the UFC to sell SF off to Bellator or some other MMA competitor to try to re-introduce competition into the marketplace.

Thanks! As a general matter, the agencies take longer to move on consummated mergers than mergers that come in through the Hart-Scott-Rodino process. That being said, it’s hard to speculate because there are so many variables at stake (weasel-y answer, I know).

E.g, how many attorneys/paralegals did they assign to the case? What other matters do they have at the moment? How high a priority is it for management? How cooperative is the UFC being? How cooperative are other industry participants being in terms of returning calls, providing documents, etc.? Are they planning to take depositions before making a decision? My best guess is that we’re probably looking at six months to a year before we hear anything.

Thanks! If you’re interested in a career in antitrust, I highly recommend the FTC. It was a fantastic place to work, with great training and mentoring opportunities.

Thanks for the questions—I’ll do my best to answer them.

1. Market definition is something the enforcement agencies (DOJ & FTC) do to analyze a particular situation, such as a specific merger. So in one particular circumstance the relevant product market could be “mixed martial arts promotion,” but in another circumstance, say a merger between Zuffa and WWE, the product market could be broader, possibly “combat sports entertainment,” and then in yet a third scenario it could be as broad as “sports entertainment.”

The reason an agency goes through the market definition exercise when analyzing a particular merger is to try to determine whether the resulting market structure will decrease competition. Unpacking that a bit, if it’s a merger to monopoly, obviously losing your only competitor (assuming barriers to entry exist) will make it easier to raise prices or decrease output. But even if it’s a 3 to 2 or 4 to 3 merger, the resulting increase in concentration could make it easier for the remaining companies to tacitly agree to increase prices. At that point it boils down to game theory.

2. Under neoclassical economic assumptions, in a monopsony scenario like you describe, the reduced costs are not passed on to consumers. The reduced costs, called “monopsony rents,” would be taken by the UFC and still result in “deadweight loss” in terms of a suboptimal number of people choosing to stay in the fight game.

It’s kind of hard to explain without sketching supply and demand curves, but essentially rather than traveling up the demand curve like you do with a monopoly, you traveling down the supply curve, but end up in the same place. All that being said, it would be much more difficult to win a case in court under a monopsony theory, because the intuition you expressed (lower costs must = lower prices) would be hard to overcome.

Thanks! The FTC generally does not seek monetary damages for antitrust cases, but if they find a violation you could possibly see a private plaintiff class action lawsuit on behalf of consumers. You could also possibly see a court action by one or more fighters, like the one Curt Flood brought against baseball.

In terms of the remedy sought by the FTC, they might force the UFC to divest Strikeforce, i.e., either spin it off or sell it to another promotion, but this would be complicated by the fact that the UFC is quickly poaching as many of Strikeforce’s top fighters as it can.

i’d rather not give out my personal contact info here, but if you leave me your email address, i’d be happy to shoot you a message.

the UFC would rely on Syufy to argue that they can’t have a monopoly because barriers to entry are low, but I think MMA is distinguishable, because there are substantial network effects that create significant barriers to entry. the network effects are that each top fighter becomes more valuable when there are other top fighters around for him to match up with. for example, Strikeforce couldn’t become as successful as the UFC just by peeling off a Henderson here and signing an Emelianenko there, you need a whole stable of world-class fighters at several weight classes to have a rival product. so i don’t think syufy goes very far. every monopolist (even Microsoft) tries to use the barriers to entry defense, but most don’t succeed.

Thanks! As I see it, the main effect of the Bellator deal would be with respect to divestiture. It might make Bellator a more viable buyer if the FTC determines that the UFC needs to sell off Strikeforce, but that, at this point, Strikeforce can no longer function as an independent business.