Market Definition Key To Decision Blocking H&R Block-TaxACT Merger

The Antitrust Division recently blocked an acquisition involving two firms selling digital do-it-yourself (DDIY) tax preparation products. The firms were H&R Block (HRB) and 2SS, which sells under the brand name TaxACT.

The Court’s key determination was to accept DOJ’s proposed product market, DDIY tax preparation products. Defendants argued that the market should also include assisted tax preparation and “pen and paper” tax preparation (including use of free online IRS forms).

To support a DDIY market, DOJ elicited defendant testimony that DDIY did not have much impact on HRB’s assisted business. DOJ’s economic expert presented IRS data that show the portion of DDIY filers staying with their DDIY provider, switching to each other DDIY provider, and switching to a non-DDIY method. He concluded that switching in response to a price increase by a hypothetical DDIY monopolist would be insufficient to invalidate the market.

Defendants attacked this market definition on several grounds. They objected that switching in the IRS data is not necessarily due to price changes and that DOJ’s analysis of IRS data would also validate other possible markets. Moreover, defendants introduced a conjoint analysis based on a discrete choice survey used by HRB in the normal course of business. Based on this analysis, the closest substitute for TaxACT was “pen and paper,” which was excluded from the hypothetical market tested by DOJ’s economist. The Court rejected the conjoint analysis because it yielded some anomalous results, it failed to specify a price for one option and its sample size was tiny compared with the IRS data. The Court also rejected HRB’s email survey because its questions about switching were not focused on switching due to a price change, its response rate was low and it used closed-ended questions without offering a full set of alternative responses.

Within a DDIY market, the largest providers are Intuit (TurboTax), HRB and TaxACT, with 62, 16 and 13 percent of DDIY tax returns, respectively. The Court found that anticompetitive coordinated effects could be presumed in what would effectively be a duopoly post-merger. To rebut this presumption, defendants argued that small DDIY firms could rapidly expand to fill TaxACT’s competitive role. The Court was not persuaded, noting the difficulty of establishing reputation among users. The Court also found that unilateral effects were likely. The Court based that conclusion on head-to-head competition between the merging products and on DOJ’s merger simulation.

Kent W Mikkelsen is a Senior Vice President with Economists Incorporated.  He has testified in federal and state courts on antitrust and damages issues.