Fill me in: Last fall staffers on the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that if implemented would wield government control over the entire U.S. economy, hampering growth, and innovation to the detriment of consumers.
As part of the Staff Report’s recommendations, the Staff proposes imposing presumptions of illegality for vertical mergers.
The Staff Report recommends:
“[T]hat Congress explore presumptions involving vertical mergers, such as a presumption that vertical mergers are anticompetitive when either of the merging parties is a dominant firm operating in a concentrated market, or presumptions relating to input foreclosure and customer foreclosure.”
What are vertical mergers?
Unlike horizontal mergers, which involve the combination of businesses that are either actual or potential competitors, vertical mergers involve the integration of firms who do not compete against each other. For example, firms at different stages of the same supply chain (e.g., an upstream manufacturer and a downstream distributor), or the integration of complements. Complements are goods that are consumed together (e.g., nuts and bolts). Vertical mergers do not reduce competition on its face since there’s no competition between the goods or services of the merging firms.
As the U.S. Antitrust Agencies have explained, the “overwhelming number of vertical mergers increase efficiencies.” Efficiencies include quality improvements and faster and/or better innovation from coordination in product, design, and innovation efforts; elimination of free-riding from the harmonization of incentives between the parties (e.g., an upstream manufacturer and a downstream distributor); the creation of a maverick (i.e., a firm that plays a disruptive role in the market to the benefit of customers); and the elimination of double-marginalization (or double markups in price by cutting out the middle-person in a supply chain).
Vertical integration characteristically has extremely powerful justifications, including a firm’s choice of organization and extent of rapid product or geographic expansion; enhanced control of upstream or downstream functions; and—perhaps most commonly—avoiding the costly processes of forming, administering, and enforcing contracts with independent suppliers and customers (e.g., contracts to distribute a product).
How U.S. antitrust law treats vertical mergers
U.S. courts and the Antitrust Agencies apply the same effects-based approach to vertical mergers as they do to horizontal mergers under which the government must prove likely anticompetitive effects that are not outweighed by efficiencies.
What's the problem?
Just like with horizontal mergers, the Staff Report’s proposal would prohibit and deter beneficial mergers that result in significant efficiencies that benefit consumers. The proposal ignores modern economic learnings, including the robust body of empirical research indicating that vertical mergers are generally procompetitive or benign. The proposal would do so despite the lack of any reliable evidence that the current approach has resulted in systematic underenforcement and harm to consumers.
In fact, the evidence is to the contrary. As former Federal Trade Commission Chief Economist Francine Lafontaine concluded after analyzing 23 empirical studies: “consistent with the large set of efficiency motives for vertical mergers . . . the evidence on the consequences of vertical mergers suggests that consumers mostly benefit from mergers that firms undertake voluntarily.” Other leading economists from the U.S. Antitrust Agencies and academia have come to the same conclusion, specifically finding that, in the empirical literature, “vertical practices are found to have significant pro-competitive effects.”
Our take: In contrast with the Staff Report’s proposal, the current approach is economically-sound and takes into account modern economic learnings. The proposal would ban beneficial mergers and sacrifice efficiencies that benefit consumers, including lower prices and greater innovation.