Abstract
Vertical mergers have attracted much attention in recent years. We assess the role of presumptions and likelihoods in vertical merger analysis and guidelines. We focus in particular on the role that we believe statistical evidence in general—and retrospective analyses more specifically—should play in determining presumptions. We also discuss how horizontal merger guidelines provide frameworks to analyze the horizontal issues that can be associated with vertical mergers. We conclude that while some vertical mergers may raise concerns, the evidence at this point does not provide sufficient guidance to develop presumptions that are related to strictly vertical issues.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
Id. at 323–324
See, e.g., Church (2008).
Per footnote 1 of the new VMG, “These Guidelines supersede the extant portions of the Department of Justice’s 1984 Merger Guidelines, which are now withdrawn and superseded in their entirety.”
See Salop and Culley (2016)—and in particular the appendix to that paper which has been updated to 2020—for a listing of 66 enforcement actions by the U.S. antitrust authorities that the authors have identified as vertical merger enforcement actions between 1994 and 2020. See also Ross and Winter, this issue, for a list of vertical merger cases that have been reviewed in Canada over the last decade. Of course, these lists are a subset of the matters that are examined by the authorities, since matters that are dropped during or after investigation, either by the firms or the authorities, are by definition excluded.
See e.g. Church (2008) for an overview.
Salop and Culley (2016), which enumerates all U.S. vertical merger actions in the past 25 years, can be used to determine the characteristics of the industries that have caused concern.
Sheu and Taragin (2021) provide a general framework for simulating vertical mergers under various sets of assumptions with respect to upstream and downstream markets and the link between the two.
In the AT&T/Time Warner case, for example, the judge indicated that under U.S. law, harms have to be probable or likely—an assessment of which often hinges on estimates and their variance across models. Similarly, in Canada, the Supreme Court “has ruled that the government has the burden to provide quantitative evidence of a lessening of competition whenever quantification is possible” (Ross and Winter, this issue).
The FTC analyzed this merger and negotiated a consent agreement with regard to it. The imposed remedy included both structural—divestiture—and behavioral components that addressed the FTC’s concerns with regard to the potential effect of the merger on consumer welfare. See https://www.ftc.gov/news-events/press-releases/1996/09/ftc-requires-restructuring-time-warnerturner-deal-settlement for more details. As a result, the analyses in this paper represent the effects of the merger given this remedy.
Indeed, assessing the effect of hospital horizontal mergers in a context where the courts had allowed mergers that the agencies had tried to block was part of the goal of the health care retrospective merger program at the FTC in the early 2000s. See Ashenfelter et al. (2011) for more on this program and the resulting studies.
In particular, the VMG state that: “Many of the principles and analytic frameworks used to assess horizontal mergers apply to vertical mergers. For example, Section 1 of the Horizontal Merger Guidelines—describing in general terms the purposes and limitations of the Horizontal Merger Guidelines and the goals of merger enforcement—is also relevant to the consideration of vertical mergers. Other topics addressed in the Horizontal Merger Guidelines, but not addressed herein—such as the analytic framework for evaluating entry considerations, the treatment of the acquisition of a failing firm or its assets, and the acquisition of a partial ownership interest—are relevant to the evaluation of the competitive effects of vertical mergers as well.”
See also Brennan (2020) on this issue.
Sunoco did not have a refinery in Quebec and wanted to concentrate its retail activities in Ontario.
Brennan (2020) makes the general point that parties should be able to achieve many of the benefits of vertical merger via contract, and so vertical merger analysis should focus on why the behavior and theory of harm require a merger. Our statement about exclusive dealing is a specific version of that more general point.
For example, Luco and Marshall (2020) find that the average soft-drink price increased, which is bad. However, that increase is not statistically significant, which is our reason for classifying the acquisition as having a neutral effect. In addition, although Hortaçsu and Syverson (2007) find that vertical integration is good, they show that changes in vertical integration—mergers—have little effect.
There is an earlier literature on divorcement that examines effects of forced divestiture of company owned gasoline service stations. That literature—which is not included in Table 1, but is summarized in Table 17 of Lafontaine and Slade (2007)—concludes that the required disintegration was a bad idea: They are all + studies.
“Enforcement dormancy” means that mergers are not deterred as much as they should be, so that the endogenous selection bias that one might worry about when examining retrospective studies as a group becomes less of a concern. This critique of retrospective studies is well articulated by Salop and Culley (2016) in footnote 34: “Studies that examine behavior in settings where anticompetitive conduct would have been deterred by the antitrust laws create a sample is [sic] biased towards finding no harm. Thus, they cannot provide reliable information about how [sic] the likely effects of the practices if the laws were relaxed to permit these practices by firms better situated to cause competitive harm.” Our point, however, is that this bias is less of a concern when enforcement is lax.
References
Ashenfelter, O. C., Hosken, D., & Weinberg, M. (2009). Generating evidence to guide merger enforcement. Competition Policy International, 5(1), 57–75.
Ashenfelter, O. C., Hosken, D., Vita, M., & Weinberg, M. (2011). Retrospective analysis of hospital mergers. International Journal of the Economics of Business, 18(1), 5–16.
Baker, J. B., Bykowsky, M., De Graba, P., LaFontaine, P., Ralph, E., & Sharkey, W. (2011). The year in economics at the FCC, 2010–11: Protecting competition online. Review of Industrial Organization, 39(4), 297–309.
Baker, J. B., Rose, N. L., Salop, S. C., & Scott Morton, F. (2019). Five principles for vertical merger enforcement policy. Antitrust, 33(3), 12–19.
Baker, L. C., Bundorf, M. K., & Kessler, D. P. (2014). Vertical integration: Hospital ownership of physician practices is associated with higher prices and spending. Health Affairs, 33(5), 756–763.
Bjornerstedt, J., & Verboven, F. (2016). Does merger simulation work? Evidence from the Swedish analgesics market. American Economic Journal: Applied, 8(3), 125–164.
Boehm, J. & Sontag, J. (2019). Vertical integration and foreclosure: Evidence from production network data. Sciences Po mimeo.
Brennan, T. J. (2020). Vertical mergers, the Coase Theorem, and the burden of proof. Journal of Competition Law and Economics, 16(4), 488–510.
Capps, C., Dranove, D., & Ody, C. (2018). The effect of hospital acquisition of physician practices on prices and spending. Journal of Health Economics, 59, 139–152.
Ciliberto, F., & Dranove, D. (2006). The effect of physician-hospital affiliations on hospital prices in California. Journal of Health Economics, 25(1), 29–36.
Chiou, L. (2017). Vertical integration and antitrust in search markets. Journal of Law, Economics, and Organization, 33(4), 653–685.
Church, J. (2008). Vertical mergers. Issues in Competition Law and Policy, 2, 1455–1501.
Crawford, G. S., Lee, R. S., Whinston, M. D., & Yurukoglu, A. (2018). The welfare effects of vertical integration in multichannel television markets. Econometrica, 86(3), 891–954.
Cuesta, J. I., Noton, C., & Vatter, B. (2019). Vertical integration between hospitals and insurers. Available at
Cutler, D.M., Dafny, L., Grabowski, D.C., Lee, S., and Ody, C. (2020). Vertical integration of healthcare providers increases self-referrals and can reduce downstream competition: The case of hospital-owned skilled nursing facilities. NBER Working paper 28305.
Gil, R. (2015). Does vertical integration decrease prices? Evidence from the Paramount Antitrust case of 1948. American Economic Journal: Economic Policy, 7(2), 162–191.
Goolsbee, A. (2007). Vertical integration and the market for broadcast television programming. FCC commissioned document.
Hortaçsu, A., & Syverson, C. (2007). Vertical disintegration: The effect of refiner exit from gasoline retailing on retail gasoline prices. Journal of Political Economy, 115(2), 250–301.
Hosken, D. & Taylor, C. (2020). Vertical disintegration: The effect of refiner exit from gasoline retailing on retail gasoline prices, FTC working paper 344.
Houde, J.-F. (2012). Spatial differentiation and vertical mergers in retail markets for gasoline. American Economic Review, 102(5), 2147–2182.
Koch, T. G., Wendling, B. W., & Wilson, N. E. (2017). How vertical integration affects the quantity and cost of health care for Medicare beneficiaries. Journal of Health Economics, 52, 19–32.
Koch, T. G., Wendling, B. W., & Wilson, N. E. (2020). The effects of physician and hospital integration on Medicare beneficiaries’ health outcomes. Review of Economics and Statistics, 1–38.
Kwoka, J. (2015). Mergers, merger control, and remedies, A retrospective analysis of U.S. policy. Cambridge: MIT Press.
Kwoka, J. (2017). The structural presumption and safe harbor in merger review: False positives or unwarranted concerns? Antitrust Law Journal, 81(3), 837–872.
Lafontaine, F., & Slade, M. E. (2007). Vertical integration and firm boundaries: The evidence. Journal Economic Literature, 45(3), 629–685.
Luco, F., & Marshall, G. (2020). The competitive impact of vertical integration by multiproduct firms. American Economic Review, 110(7), 2041–2064.
Meeks, G. (1977). Disappointing marriage: A study of the gains from merger. Cambridge: Cambridge University Press.
Mullin, J. C., & Mullin, Wallace P. (1997). United States steel’s acquisition of the Great Northern Properties: Vertical foreclosure or efficient contractual governance? Journal of Law, Economics, and Organization, 13(1), 74–100.
OECD Competition Committee (2017). Safe harbours and legal presumptions in competition law. Background note by the Secretariat.
Peters, C. (2006). Evaluating the performance of merger simulations: Evidence from the U.S. airline industry. Journal of Law and Economics, 49(2), 627–649.
Ravenscraft, D. J., & Scherer, F. M. (1989). The profitability of mergers. International Journal of Industrial Organization, 7(1), 101–116.
Rogerson, W. P. (2014). A vertical merger in the video programming industry: The case of Comcast NBCU. In J. E. Kwoka & L. J. White (Eds.), The Antitrust Revolution (6th ed., pp. 534–575). Oxford: Oxford University Press.
Ross, T. W. & R. A. Winter (2021). A Canadian Perspective on Vertical Merger Policy and Guidelines. Review of Industrial Organization, this issue.
Salop, S. C., & Culley, D. P. (2016). Revising the U.S. vertical merger guidelines: Policy issues and an interim guide for practitioners. Journal of Antitrust Enforcement, 4(1), 1–41.
Salop, S. C., & Culley, D. P. (2018). Invigorating vertical merger enforcement. Yale Law Journal, 127, 1962–1994.
Shapiro, C. (2019). Testing vertical mergers for vertical foreclosure. Background paper for the OECD Competition Committee meeting, Paris, June 5-7.
Shenoy, J. (2012). An examination of the efficiency, foreclosure, and collusion rationales for vertical takeovers. Management Science, 58(8), 1482–1501.
Sheu, G. & Taragin, C. (2021). Simulating mergers in a vertical supply chain with bargaining. Rand Journal of Economics (forthcoming).
Slade, Margaret E. (1998). Beer and the tie: Did divestiture of brewer-owned public houses lead to higher beer prices? Economic Journal, 108(448), 1–38.
Slade, Margaret E. (2009). Merger simulations of unilateral effects: What can we learn from the UK brewing industry? In B. Lyons (Ed.), Cases in European competition policy: The economic analysis (pp. 312–346). Cambridge: Cambridge University Press.
Straub, T. (2007). Reasons for frequent failures in mergers and acquisitions: A comprehensive analysis. Berlin: Springer.
Stigler Committee on Digital Platforms. (2019). Policy brief. Stigler Center for the Study of the Economy and the State.
Suzuki, A. (2009). Market foreclosure and vertical merger: A case study of the vertical merger between Turner Broadcasting and Time Warner. International Journal of Industrial Organization, 27(4), 532–543.
Vita, M., & Osinski, F. D. (2018). John Kwoka’s Mergers, Merger control, and remedies: A critical review. Antitrust Law Journal, 82, 361–387.
Weinberg, M. C., & Hosken, D. (2013). Evidence on the accuracy of merger simulations. Review of Economics and Statistics, 95(5), 1584–1600.
Acknowledgements
We would like to thank Marissa Beck, Griet Jans, Guillermo Marshall, Nathan Wilson, as well as participants in the Pros and Cons of Presumptions 2020 research seminar at the Swedish Competition Authority and the 2020 Southern Economic Association session on vertical mergers, and participants at the Dyson Strategy Virtual seminar at Cornell University, for their thoughtful comments. We also thank the editor of this special issue for organizing and managing the creation of this issue, and the general editor for his thorough review and comments on the paper.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Lafontaine, F., Slade, M.E. Presumptions in Vertical Mergers: The Role of Evidence. Rev Ind Organ 59, 255–272 (2021). https://doi.org/10.1007/s11151-021-09831-0
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11151-021-09831-0