Antitrust Regulators Release New Vertical Merger Guidelines

Antitrust Regulators Release New Vertical Merger Guidelines

Legal Sidebar
Antitrust Regulators Release
New Vertical Merger Guidelines
July 21, 2020
On June 30, the Department of Justice (DOJ) and Federal Trade Commission (FTC) finalized new
Vertical Merger Guidelines (VMG) outlining their approach to mergers and acquisitions between firms at
different stages of a supply chain. The revised guidelines are timely: vertical integration is growing
increasingly economical y significant and political y fraught. As large firms in major industries—
including health care, telecommunications, agriculture, and information technology—make prominent
vertical deals, some lawmakers and economists have cast a critical eye toward a phenomenon that was
once viewed as largely benign. This Legal Sidebar provides a general overview of vertical merger
enforcement and discusses the implications of the new VMG. A companion CRS Insight analyzes
competition issues raised by vertical integration in digital markets—a topic that the revised guidelines do
not explicitly address.
Vertical Merger Enforcement
Section 7 of the Clayton Antitrust Act prohibits mergers and acquisitions that may “substantial y lessen”
competition. The statute applies to both horizontal mergers between competitors (i.e., rival widget
manufacturers) and vertical deals between firms at different stages of a supply chain (i.e., a widget
manufacturer and a widget retailer).
While horizontal mergers can harm competition by al owing firms to directly absorb rivals, the potential
harms of vertical transactions are more indirect. Vertical mergers most often raise antitrust concerns when
an integrated firm would have the ability and incentive to “foreclose” rivals from supplies or customers.
For example, if a large widget manufacturer acquires a widget retailer, the vertical y integrated firm may
charge higher prices to competing retailers or withhold widgets from those rivals altogether. And these
tactics can harm competition by diminishing the ability of other retailers to chal enge the vertical y
integrated firm. Similarly, if a large widget retailer acquires a widget manufacturer, the vertical y
integrated firm may refuse to purchase widgets from rival manufacturers, harming their competitive
prospects.
But vertical mergers can also generate efficiencies. Because vertical y integrated firms acquire inputs at
cost while unintegrated companies typical y pay a markup, integrated firms can theoretical y pass cost
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savings along to their customers. This phenomenon—which antitrust practitioners have dubbed the
“elimination of double marginalization” (EDM)—often plays a key role in evaluations of vertical
transactions.
Traditional y, the DOJ and FTC—which share authority to enforce federal antitrust law—have policed
vertical mergers less aggressively than horizontal deals. This deferential posture toward vertical
transactions was driven in part by academic theories from the Chicago School of antitrust analysis, which
heavily influenced antitrust doctrine in the 1970s and 1980s. Chicago School theorists viewed vertical
integration as unobjectionable and mostly procompetitive, arguing that foreclosure is unlikely and that
EDM general y benefits consumers.
But the tide may be turning. Post-Chicago scholarship has chal enged the claim that vertical foreclosure is
largely nonexistent. Economists have also argued that firms do not always pass the benefits of EDM to
consumers. And some lawmakers have grown increasingly critical of vertical consolidation as major
industries have become more integrated.
These trends may have already influenced the antitrust regulators. In 2017, the DOJ sued to block
AT&T’s merger with Time Warner in what became the first vertical transaction litigated to judgment in
nearly 40 years. While the DOJ was unsuccessful, commentators have speculated that its lawsuit may
signal a more skeptical approach toward future vertical deals.
The New Vertical Merger Guidelines
The revised VMG—which replace the DOJ’s increasingly outdated 1984 Non-Horizontal Merger
Guidelines—reflect the analytical framework that now guides the antitrust regulators’ review of vertical
transactions. While the new guidelines are not legal y binding, courts wil likely treat them as persuasive
authority in evaluating merger chal enges, especial y in light of the thin case law on vertical deals.
The revised VMG begin with a recitation of familiar antitrust principles. The DOJ and FTC explain that
they scrutinize proposed mergers for possible harms to competition but do not seek to protect competitors.
Although the agencies note that problematic horizontal mergers are more common than objectionable
vertical deals, they acknowledge that vertical integration is “not invariably innocuous.” The guidelines
then discuss the harms and benefits that the regulators weigh in assessing vertical mergers. Consistent
with post-Chicago scholarship and recent enforcement actions, the VMG identify a range of possible
harms from vertical transactions, including the following:
 Foreclosure and Raising Rivals’ Costs. The new VMG explain that the DOJ and FTC
wil analyze whether vertical mergers are likely to give integrated firms the ability and
incentive to (1) refuse to supply rivals with a product or service, or (2) raise rivals’ costs
by increasing the price or degrading the quality of a product or service.
 Access to Competitively Sensitive Information. The VMG note that some vertical deals
may give integrated firms access to rivals’ sensitive business information, which may
deter those rivals from taking certain procompetitive actions. While the guidelines do not
offer an example here, commentators have theorized that integrated firms that sel inputs
to competitors may have a window into those competitors’ new product offerings. If an
integrated firm uses this information to quickly imitate those products, the firm’s
downstream rivals may lose the incentive to innovate.
 Coordinated Effects. Final y, the regulators explain that some vertical mergers may
facilitate post-merger coordination among competitors. For example, a vertical deal
might eliminate or hinder a “maverick” firm that disciplined market pricing. A vertical
merger might also al ow an integrated firm to more easily detect “cheating” on tacit

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 agreements—for example, implicit agreements to restrict output—by rivals that purchase
the firm’s products.
On the “benefit” side of the ledger, the VMG identify the standard efficiencies that firms proffer in
defense of vertical integration. Specifical y, the DOJ and FTC acknowledge that vertical mergers can
generate procompetitive benefits from EDM and the combination of complementary economic functions.
Although the guidelines explain that it is “incumbent” upon merging firms to substantiate claimed
efficiencies, the agencies note that they may also “independently” assess such claims “based on al
available evidence.”
Issues for Congress
While the new VMG expand upon the 1984 guidelines, they have also generated criticism from
commentators who contend they do not go far enough. Both Democratic FTC Commissioners dissented
from the revised guidelines, arguing that they overemphasize the benefits of vertical integration, neglect
the unique issues posed by digital markets, and fail to address important topics like labor market
competition, nonprice harms, and remedies. Some Members of Congress have also echoed similar
concerns.
To address these issues, Congress could instruct the agencies to revisit the VMG, directly amend the
antitrust laws, or enact sector-specific competition regulation. For example, S. 307 in the 116th Congress
would broaden the legal standard under which the agencies can block mergers and shift the burden of
proof to defendants in merger chal enges involving large companies. Some commentators have also urged
Congress to pass legislation adopting presumptions of il egality and even outright bans on vertical
integration by dominant technology platforms. Final y, Congress can use its investigative powers to
further examine the effects of vertical integration—a subject that is likely to be of interest when the CEOs
of four large technology companies testify before the House Judiciary Committee later this month.

Author Information

Jay B. Sykes

Legislative Attorney

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