Vertical Mergers and the MFN Thicket in Television

Abstract

Increasingly, cable and satellite TV services (known as “MVPDs”) seek to acquire upstream programming creators, as illustrated by AT&T’s recent merger with Time-Warner. At the same time, the pay-TV industry is rife with “most-favored nation” (MFN) agreements, which can sharply constrict the competitive process. The most problematic variety, so-called “unconditional” MFNs, raise serious antitrust concerns, as they may forestall effective entry by new streaming-based platforms; penalize pro-competitive deviations from the status quo; and facilitate de facto coordination among integrated MVPDs.

While vertical mergers in the industry have received significant antitrust attention, the MFN concerns are interrelated. Problematic MFNs may naturally induce a double marginalization problem, even if the parties are otherwise capable of contracting around it. This creates a strong motivation for integration, but it also raises a question as to whether a merger is the only way to avoid double marginalization. Further, MFNs might compel a problematic form of reciprocal dealing that generates de facto price fixing between integrated rivals. Consequently, the industry’s trend toward integration may trigger other kinds of anti-competitive conduct.

Keywords: Vertical Merger, Vertical Integration, Antitrust, Most-favored Nation, MFN, AT&T, Time-Warner, Comcast, Double Marginalization, MVPD, OTT, Programming, Merger-specific, Reciprocal Dealing, Coordination

JEL Classification: K21, L40, L24, L96, L42, L82, L86, O34