Understanding the Benefits of Vertical Mergers: How They Differ from Horizontal Mergers

In the world of antitrust and competition policy, mergers are scrutinized to ensure they don’t harm consumers or stifle competition. It’s important to distinguish between two primary types: horizontal and vertical mergers. 

Historically, vertical mergers are viewed as less problematic than horizontal mergers, for good reason. A new paper, Integrating the Literature: Theory and Evidence from a Reassessment of the Empirical Research on Vertical Integration provides compelling evidence to support how vertical mergers benefit consumers and the economy. 

What Are Vertical and Horizontal Mergers? 

A horizontal merger occurs when two companies in the same market combine, such as grocery store chains merging. These mergers warrant closer scrutiny, as they could result in reduced competition, higher prices, and stifled innovation. 

In contrast, a vertical merger involves companies that operate at different levels of the supply chain, like a manufacturer merging with a distributor. These mergers integrate complementary operations, leading to efficiencies and other benefits. 

How Vertical Mergers Unlock Economic Growth  

1. Empirical Evidence Supports Procompetitive Effects Recent findings reveal that vertical mergers overwhelmingly result in procompetitive effects. Empirical evidence consistently points to these effects, which often enhance efficiency and consumer welfare. 
2. Elimination of Double Marginalization (EDM) Vertical mergers eliminate double marginalization, reducing costs throughout the supply chain, which lowers prices for consumers and increases output. 
3. Distinct Treatment in Antitrust Policy Empirical evidence doesn’t support increased scrutiny of vertical mergers. These mergers should be assessed under separate guidelines that reflect their unique characteristics and efficiencies.
4. Benefits Across Industries Various industries can benefit from vertical mergers. From improved capital flows to enhanced productivity, vertical integration leads to innovations that benefit consumers. 

Vertical Merger Guidance  

Despite evidence, recent voices have tried to alter antitrust enforcement. The Biden administration increased scrutiny of vertical deals, rejecting accepted guidance and instead adopting a one-size-fits-all approach. Their concerns lack support by empirical data, and subjecting such deals to intense scrutiny only undermines potential consumer benefits and efficiencies.

Integrating the Literature highlights the need to distinguish between vertical and horizontal mergers in antitrust policy. With separate guidelines, policymakers can balance protecting competition with promoting economic dynamism. The Federal Trade Commission and the Department of Justice should return to standalone guidelines that recognize the the unique dynamics of vertical integration.

About the author

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

Read more