40 Pages Posted: 19 Nov 2020
Date Written: November 11, 2020
From the standpoint of competition policy, it might seem desirable to modularize competition to the greatest extent possible so that the best and cheapest products prevail at every stage of a production process and in every component of systems of complementary products. But integration can also create efficiencies – both real and contractual/organizational. Producers at one stage of a value chain often have the greatest incentive and the greatest technical capacity to lower prices or improve products at an adjacent stage. The challenge for public policy is how to trade off the costs of foreclosure resulting from self-preferencing against the efficiencies of integration. Because these trade-offs are complicated, it is perhaps not surprising that there have been pendulum swings in enforcement philosophies and expert opinions. Through the 1960’s, antitrust enforcement in the United States was generally hostile to vertical integration. Then, starting in the late 1970’s, antitrust enforcers began viewing vertical mergers and vertical integration as being almost entirely benign. In recent years, the pendulum seems to have at least started to swing back as several prominent scholars have argued for a much more aggressive stance against vertical integration and foreclosure. A general theme of this chapter is that despite these swings in opinion, the economics of how to weigh the competing effects on a case-by-case basis is still under-developed. As a result, presumptions play an important role in enforcement. A key question for policy makers is whether there should still be a presumption that the economic relationship between the production of vertically-related and complementary products is fundamentally different from the economic relationship between the production of substitute products. If so, intervention with respect to vertical/complementary mergers, agreements, and expansion should be far more limited than intervention with respect to horizontal mergers, agreements, and (to a lesser extent) expansion.
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