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There seems to be consensus that the Department of Justice's 1984 Vertical Merger Guidelines do not reflect either modern theoretical and empirical economic analysis or current agency enforcement policy. Yet widely divergent views of preferred enforcement policies have been expressed among agency enforcers and commentators. Based on our review of the relevant economic literature and our experience analyzing vertical mergers, we recommend that the enforcement agencies adopt five principles: (i) The agencies should consider and investigate the full range of potential anticompetitive harms when evaluating vertical mergers; (ii) The agencies should decline to presume that vertical mergers benefit competition on balance in the oligopoly markets that typically prompt agency review, nor set a higher evidentiary standard based on such a presumption; (iii) The agencies should evaluate claimed efficiencies resulting from vertical mergers as carefully and critically as they evaluate claimed efficiencies resulting from horizontal mergers, and require the merging parties to show that the efficiencies are verifiable, merger-specific and sufficient to reverse the potential anticompetitive effects; (iv) The agencies should decline to adopt a safe harbor for vertical mergers, even if rebuttable, except perhaps when both firms compete in unconcentrated markets; (v) The agencies should consider adopting rebuttable anticompetitive presumptions that a vertical merger harms competition when certain factual predicates are satisfied. We do not intend these presumptions to describe all the ways by which vertical mergers can harm competition, so the agencies should continue to investigate vertical mergers that raise concerns about input and customer foreclosure, loss of a disruptive or maverick firm, evasion of rate regulation or other threats to competition, even if the specific factual predicates of the presumptions are not satisfied.
Mergers and acquisitions are a major component of antitrust law and practice. The U.S. antitrust agencies spend a majority of their time on merger enforcement. The focus of most merger review at the agencies involves horizontal mergers, that is, mergers among firms that compete at the same level of production or distribution.Vertical mergers combine firms at different levels of production or distribution. In the simplest case, a vertical merger joins together a firm that produces an input (and competes in an input market) with a firm that uses that input to produce output (and competes in an output market).Over the years, the agencies have issued Merger Guidelines that outline the type of analysis carried out by the agencies and the agencies' enforcement intentions in light of state of the law. These Guidelines are used by agency staff in evaluating mergers, as well as by outside counsel and the courts.Guidelines for vertical mergers were issued in 1968 and revised in 1984. However, the Vertical Merger Guidelines have not been revised since 1984. Those Guidelines are now woefully out of date. They do not reflect current economic thinking about vertical mergers. Nor do they reflect current agency practice. Nor do they reflect the analytic approach taken in the 2010 Horizontal Merger Guidelines. As a result, practitioners and firms lack the benefits of up-to-date guidance from the U.S. enforcement agencies.
We have revised our earlier listing of vertical merger enforcement actions by the Department of Justice and Federal Trade Commission since 1994. This revised listing includes 66 vertical matters beginning in 1994 through April 2020. It includes challenges and certain proposed transactions that were abandoned in the face of Agency concerns. This listing can be treated as an Appendix to Steven C. Salop and Daniel P. Culley, Revising the Vertical Merger Guidelines: Policy Issues and an Interim Guide for Practitioners, 4 JOURNAL OF ANTITRUST ENFORCEMENT 1 (2016).
These recommendations and comments respond to the request by the Federal Trade Commission and the Department of Justice's Antitrust Division for public comment on the draft 2020 Vertical Merger Guidelines. We commend the agencies for updating the 1984 non-horizontal merger guidelines by recognizing the substantial advances in economic thinking about vertical mergers in the thirty-five years since those guidelines were issued. Our comments emphasize four issues: (i) the treatment of the elimination of double marginalization (“EDM”), particularly that the draft vertical merger guidelines appear inappropriately to make proof of cognizability part of the agencies burden and that they appear to inappropriately treat the merging firm's failure to have eliminated double marginalization pre-merger as proof that the merger would lead to EDM and that the post-merger EDM would be merger-specific; (ii) the seemingly arbitrary and inappropriately permissive safe harbor; (iii) the inappropriate (though perhaps unintended) apparent requirement that harms be quantified; and (iv) the inappropriate (though perhaps unintended) apparent requirement that the agencies show that foreclosure would not have been profitable before the merger. We are concerned that these features of the draft Guidelines will lead to under-enforcement and false negatives (including under-deterrence).
This Feature summarizes why and how vertical merger enforcement should be invigorated. In our modern market system, vigorous vertical merger enforcement is a necessity. Strong enforcement is particularly important in markets where economies of scale and network effects lead to barriers to entry and durable market power. Even when there are parallel vertical mergers, the result may well be an anticompetitive reciprocal dealing, coordinated equilibrium rather than intense competition among efficient integrated firms. Stronger enforcement would involve several steps, including recognition that claims of elimination of double marginalization do not deserve to be silver bullets and that behavioral remedies are generally unable to prevent anticompetitive effects.
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