Competition in Digital Markets: Vertical Integration and Acquisitions

Competition in Digital Markets: Vertical Integration and Acquisitions

INSIGHTi
Competition in Digital Markets:
Vertical Integration and Acquisitions
July 21, 2020
Competition in digital markets is drawing attention from Congress, foreign regulators, and antitrust
authorities. The House Judiciary Committee opened an investigation of digital markets in 2019. The same
year, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) reportedly opened
antitrust investigations into four companies—Alphabet, Amazon, Apple, and Facebook. These firms,
along with Microsoft, are currently the most valuable publicly traded companies in the United States, and
are often referred to as “Big Tech.” Possible issues in the pending investigations may include the effects
of vertical integration and acquisitions on competition.
On June 30, 2020, the DOJ and FTC released new Vertical Merger Guidelines. The guidelines outline the
agencies’ approach to examining mergers and acquisitions at different stages of a supply chain. The
guidelines do not explicitly address digital markets, leaving it unclear how these agencies are examining
“Big Tech” in their investigations. This CRS Insight analyzes competition issues raised by vertical
integration in digital markets and how acquisitions involving “Big Tech” may differ from those in other
industries. A companion CRS Legal Sidebar provides a general overview of vertical merger enforcement
and discusses the implications of the new guidelines.
Identifying Supply Chains and Markets
In markets for physical products, vertical relationships tend to be clearly defined as goods flow from
commodity producers to processors to distributors, and then to consumers. In digital markets, these
distinctions tend to be less clear. For example, some users of websites and apps—such as Facebook’s
Instagram and Alphabet’s YouTube—are paid to post images and videos if they obtain a certain number of
followers, meaning these users serve as both consumers and suppliers.
The difficulty of defining supply chains for digital markets can make it chal enging to determine when
vertical integration may be harmful to competition. For example, a company that publishes books might
try to integrate vertical y by purchasing the only company that makes a certain type of paper; antitrust
authorities might then investigate how the acquisition affects competition with other publishers and prices
faced by book buyers. In digital markets, companies have built assets, such as fiber optic cables and
satel ites, to transmit their data, possibly faster or more reliably than competitors who do not own such
infrastructure. Content providers like Alphabet, Amazon, Facebook, and Microsoft collectively own or
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lease more than half of the global capacity of undersea cables. It is unclear how this may affect
competition in the markets these companies operate in.
Competition analysis usual y begins by defining markets, but digital products may not fit neatly into
defined markets. For example, Alphabet’s YouTube al ows users to produce and post their own videos and
offers movies and television shows produced by entertainment and media companies. YouTube could
hypothetical y increase its market share in the social media market while simultaneously decreasing its
share in the streaming services market, which overlaps with the broadcast television market. None of
these market definitions addresses Alphabet’s share of the digital advertising market, which serves as its
major source of revenue.
Vertical Integration in Digital Advertising
The digital advertising market has undergone vertical integration. In addition to sel ing ad spaces adjacent
to content on their online platforms, some “Big Tech” companies have integrated into advertising-related
services that can be used by advertisers to target ads and bid for ad spaces. This creates the possibility of
tying, in which a vertical y integrated company might require that its advertising-related services be used
to place advertisements on its online platforms. If other online platforms use these advertising-related
services, the vertical y integrated company might then be able to obtain additional data to help the
advertisers that use its services target ads more effectively to consumers. Thus, a company that has
integrated vertical y may have an advantage over competitors that are less vertical y integrated,
potential y reducing competition in advertising-related services. Because consumer prices are not
affected, U.S. antitrust authorities may not focus on such conduct. In 2019, the European Commission
fined Google €1.49 bil ion ($1.7 bil ion) for violating the European Union’s antitrust rules by preventing
rivals from competing in the online search advertising market.
Acquisitions in Digital Markets
In some cases, mergers and acquisitions have given rise to vertical integration. Google’s acquisition of
Android in 2005 helped it develop a mobile phone operating system that consumers can use to access
apps, including those created by Google (now part of Alphabet). However, vertical integration often
emerges from internal product development. For example, consumers use Alphabet’s Google Play and
Apple’s App Store, developed by the respective companies, to download apps onto various devices.
Alphabet and Apple can charge owners of other apps to be included in Google Play and the App Store,
even when the apps compete with similar apps owned by Google and Apple. It is unclear how the DOJ
and FTC might evaluate these forms of vertical integration, particularly if the integrated components were
not the result of acquisitions.
Issues for Congress
Competition in digital markets and related concerns have been subjects of interest in Congress. A Senate
Judiciary Committee subcommittee has held hearings on digital markets, including one in 2019 on the
acquisitions of potential competitors and one in 2020 on self-preferencing by digital platforms. As a part
of its digital markets investigation, the House Judiciary Committee has held five hearings explicitly
addressing competition issues related to “Big Tech,” with a sixth scheduled for July 27. A primary
concern throughout these hearings has been how to ensure companies are not impeding innovation with
anticompetitive conduct, while encouraging innovation in fast-changing markets. As it evaluates possible
changes in legislation, Congress may also wish to consider whether the revised Vertical Merger
Guidelines provide sufficient guidance to firms in digital markets.

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Author Information

Clare Y. Cho

Analyst in Industrial Organization and Business

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