Vertical Control

20 Pages Posted: 1 Mar 2021 Last revised: 16 Sep 2021

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: Sep 16, 2021

Abstract

Antitrust litigation often requires courts to consider challenges to vertical “control.” How does a firm injure competition by limiting the behavior of vertically related firms? Competitive injury includes harm to consumers, labor, or other suppliers from reduced output and higher margins.

Historically antitrust considers this issue by attempting to identify a market that is vertically related to the defendant, and then consider what portion of it is “foreclosed” by the vertical practice. There are better mechanisms for identifying competitive harm, including a more individualized look at how the practice injures the best placed firms or bears directly on a firm’s ability to reduce output and increase its price without losing so many sales that the price increase is unprofitable.

One important consequence of these new approaches is that the market share numbers that the antitrust case law traditionally attaches to foreclosure percentages are not particularly meaningful. The tying and exclusive dealing case law generally aggregates the market subject to foreclosure concerns and considers foreclosure as a percentage of an undifferentiated whole. In general, it proclaims minimum market foreclosure percentages in the range of 30% - 40% as a condition for illegality. When we focus more accurately on marginal effects and the possibility of raising rivals’ costs, however, these numbers are much less significant. For example, if the lowest cost firm in a market is subject to an exclusivity agreement, anticompetitive results, particularly RRC, could obtain even if the percentage of total sales is far less than 30%. By contrast, if only the least efficient firm or firms in a market were made subject to such an agreement, even aggregate foreclosure percentages higher than 40% might result in no competitive harm.

Keywords: monopoly, vertical restraints, exclusive dealing, tying, mergers, MFN clauses

Suggested Citation

Hovenkamp, Herbert, Vertical Control (Sep 16, 2021). U of Penn, Inst for Law & Econ Research Paper No. 21-13, NYU Law Review Online (2021), Available at SSRN: https://ssrn.com/abstract=3793733 or http://dx.doi.org/10.2139/ssrn.3793733

Herbert Hovenkamp (Contact Author)

University of Pennsylvania Carey Law School ( email )

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University of Pennsylvania - The Wharton School ( email )

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University College London ( email )

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