Antitrust Analysis of Vertical Mergers: Recent Developments and Economic Teachings

ABA Antitrust Source, February 2019

13 Pages Posted: 6 Dec 2018 Last revised: 10 Mar 2019

See all articles by Koren Wong-Ervin

Koren Wong-Ervin

Director of IP & Competition Policy at Qualcomm Incorporated and Senior Expert at China's University of International Business & Economics (formerly at the U.S. Federal Trade Commission)

Date Written: October 30, 2018

Abstract

The generally well-accepted belief motivating modern antitrust analysis of vertical mergers — i.e., acquisitions that combine companies in different levels of the same supply chain — is that they are generally procompetitive or neutral. That belief is based upon a significant body of empirical evidence. Indeed, as former U.S. Federal Trade Commission (FTC) Bureau of Economics head Francine Lafontaine and Margaret Slade concluded, “[c]onsistent with the large set of efficiency motives for vertical mergers . . . the [empirical] evidence on the consequences of vertical mergers suggests that consumers mostly benefit from mergers that firms undertake voluntarily.” That view of the empirical evidence is consistent with other meta-studies of the empirical evidence by leading industrial organization economists from academia and the U.S. antitrust agencies. Consistent with this evidence, the U.S. antitrust agencies typically have rarely challenged vertical mergers. When they have challenged vertical mergers, they have tended to resolve concerns with narrowly tailored behavioral remedies, such as firewalls to prevent the sharing of rivals’ competitively sensitive information, non-discrimination clauses to eliminate incentives to disfavor rivals, and requirements to supply and/or license competitors.

This Article is organized as follows: Section I sets forth the empirical evidence supporting the widespread understanding that vertical integration is generally procompetitive or neutral, and responds to the major critiques of these studies. Section I also discusses typical justifications for vertical integration, namely avoiding the costly and risky processes of forming, administering, and enforcing contracts with independent suppliers and customers. Section II lays out the economic approach to antitrust analysis of vertical mergers, briefly addressing calls for the U.S. antitrust agencies to update their 1984 Non-Horizontal Merger Guidelines. Section III discusses remedies. The final section offers closing thoughts focusing on the relative expertise of agencies and courts as compared to merging parties in evaluating the costs and benefits of vertical integration.

Keywords: Vertical Mergers, Vertical Integration, DOJ, FTC, Vertical Merger Guidelines, Empirical Evidence, Presumptions, Theory of the Firm

JEL Classification: K21, l4, l5

Suggested Citation

Wong-Ervin, Koren, Antitrust Analysis of Vertical Mergers: Recent Developments and Economic Teachings (October 30, 2018). ABA Antitrust Source, February 2019. Available at SSRN: https://ssrn.com/abstract=3273344 or http://dx.doi.org/10.2139/ssrn.3273344

Koren Wong-Ervin (Contact Author)

Director of IP & Competition Policy at Qualcomm Incorporated and Senior Expert at China's University of International Business & Economics (formerly at the U.S. Federal Trade Commission) ( email )

1730 Pennsylvania Ave N.W.
Suite 850
Washington DC, DC 20006-1850
United States

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