On January 10, 2020 the United States Department of Justice (DOJ) and the Federal Trade Commission (FTC) released draft guidelines outlining the agencies' "analytical techniques, practices, and enforcement policy" for vertical mergers under the federal antitrust laws.1 The FTC voted to issue the Draft Guidelines and solicit public comments, with three Republican commissioners voting in favor, and two Democratic commissioners abstaining.2 The comment period, which allows the public to provide comments on the Draft Guidelines, is open until February 11, 2020, and the agencies will consider those comments as they prepare a final set of guidelines.
Release of the Draft Guidelines follows extended discussion of the law and economics of vertical mergers among practitioners and scholars and a number of high-profile investigations and enforcement actions in recent years. The Draft Guidelines, if adopted, will replace and supersede the DOJ's 1984 guidelines on vertical mergers.3 As with the existing Horizontal Merger Guidelines, the new Draft Guidelines will not operate as legal rules or an exhaustive catalog of the Agencies' considerations in evaluating vertical mergers, but are intended to provide guidance to businesses and antitrust practitioners and to assist courts in interpreting and applying antitrust law as it relates to vertical mergers.
Market Definition
The Draft Guidelines describe the agencies' approach to defining one or more relevant markets for the purpose of evaluating a vertical merger.4 Beyond the techniques for market definition applied in horizontal merger cases,5 the agencies will also identify one or more "related products" in evaluating vertical mergers.6 The Draft Guidelines define a related product as "a product or service that is supplied by the merged firm, is vertically related to the products and services in the relevant market, and to which access by the merged firm's rivals' affects competition in the relevant market."7 Related products may be "an input, means of distribution, or access to a set of customers."8 For example, if a retail chain purchases the manufacturer of a product it sells, one relevant market would be supply of that product to retail consumers in a particular geographic area. One "related product" for this market would be the manufacturer's supply of the product in the same geographic area.
Market Participants, Market Shares, and Market Concentration
The Draft Guidelines' most significant proposal is a safe harbor based on market shares. The Draft Guidelines state that the agencies are not likely to challenge vertical mergers in which the parties "have a share in the relevant market of less than 20 percent, and the related product is used in less than 20 percent of the relevant market."9 While the Draft Guidelines' 20 percent threshold may provide a safe harbor for certain vertical transactions, the document notes that shares exceeding 20 percent (either in the relevant market or for a related product's share of use in the relevant market) do not support an inference that the merger is likely to have anticompetitive effects.10 In addition, the Draft Guidelines note that the proposed thresholds are not a bright-line screening tool to separate out mergers unlikely to have anticompetitive effects.11 Thus, the proposed safe harbor will not guarantee that transactions in which market share and product use fall below the 20 percent threshold will be immune from scrutiny.
Evidence of Adverse Competitive Effects
The Draft Guidelines' approach to the types of evidence the agencies will consider in evaluating a vertical merger is consistent with the approach taken in the 2010 Horizontal Merger Guidelines.12 The agencies will consider "any reasonably available and reliable evidence" in evaluating whether a vertical merger may substantially lessen competition, including:
- "actual effects observed in consummated mergers";
- "direct comparisons based on experience";
- evidence that one of the merging parties plays a disruptive role in a relevant market;
- the firms' "market shares and concentration in the relevant market and related products";
- evidence of competition between one merging firm and rivals that do business with the other merging firm (e.g., evidence of competition between retailers where one retailer seeks to merge with a manufacturer that supplies other retailers in the relevant market); and
- "documents and testimony of the merging firms, their customers, and other industry participants and observers."13
Unilateral Effects
The Draft Guidelines provide a non-exhaustive list of scenarios in which vertical mergers may raise competitive concerns and warrant agency scrutiny, focusing on foreclosure, raising rivals' costs, and the use of competitively sensitive information acquired through a vertical merger.
First, the Draft Guidelines note that vertical mergers may have anticompetitive effects by allowing the merged firm to change the terms on which its rivals can access related products ("raising rivals' costs").14 For example, if a retailer and a manufacturer merge, the merged firm may increase the price or decrease the quality of the products provided to the retailers' competitors, effectively raising their costs of doing business. A vertical merger may also result in market foreclosure if the merged firm denies its competitors access to a related product (e.g., a merged retailer and manufacturer deny competing retailers access to the manufacturer's product, foreclosing them from the market).15
According to the Draft Guidelines, the agencies may consider whether:
- the merged firm's raising of its rivals' costs or access denials could cause competitors to lose sales or "otherwise compete less aggressively for customers' business";
- the merged firm would benefit from foreclosure of rivals or raising rivals' costs;
- the merger makes foreclosure or raising rivals' costs profitable for the merged firm; and
- whether the extent of the likely foreclosure or raising of rivals' costs would substantially lessen competition.16
Access to Competitively Sensitive Information
The Draft Guidelines also note that a firm created through a vertical merger may gain access to competitively sensitive business information about rivals in either upstream or downstream markets that it did not have access to before the merger.17 Such information may allow the merged firm to restrict competition by anticipating or quickly reacting to a rival's business strategy.18 Recent enforcement actions suggest that the agencies may address concerns about access to competitively sensitive information in a vertical merger through behavioral remedies. For example, in the recent Staples/Essendant merger, Staples, a vertically integrated supplier of office products with retail locations, merged with Essendant, a distributor of office products that also supplied some of Staples' competitors.19 The FTC permitted the merger but imposed a firewall barring Staples from accessing competitively sensitive information about Essendant's customers.20
Coordinated Effects
The Draft Guidelines also raise the concern that vertical mergers may reduce competition and harm consumers by enabling or encouraging coordination between firms in the relevant market.21 The Draft Guidelines indicate that the 2010 Horizontal Merger Guidelines still represent the agencies' approach to coordinated effects, and offer a non-exhaustive set of ways in which coordinated effects may become more likely because of a vertical merger.22 For example, after a vertical merger, the merged firm may use its control of a product, distribution channel, or access to a set of customers to impede a maverick firm that might otherwise play a disruptive role in the market and limit anticompetitive coordination.23 A vertical merger may also provide access to confidential information that can enable tacit agreement between firms, help firms detect cheating on agreements, or assist coordinating firms in punishing competitors that cheat on an agreement.24
Elimination of Double Marginalization
The Draft Guidelines note that the agencies will not challenge vertical mergers where the elimination of double marginalization (EDM) makes it unlikely that the merger will be anticompetitive.25 EDM may occur when two vertically related firms merge. Before the merger, each firm independently sets a markup on its products. Post-merger, the new firm captures the margins of both the upstream and downstream firms, and one party's markup may be eliminated. One potential result of EDM in a vertical merger is that capturing both margins may make a price reduction profitable for the merged firm where it would not have been before the merger. EDM may accordingly benefit both the merged firm and downstream consumers and is considered to be a significant pro-consumer benefit of vertical mergers. While the Draft Guidelines recognize the benefits of EDM, they also note that in some situations EDM will not occur or will be offset by other pricing incentives. For example, no EDM occurs if the downstream firm does not use the products made by the upstream firm, and a firm may find it profitable to increase rather than decrease prices if competitors who purchase from the merged firm's upstream business increase sales.26
Efficiencies
The Draft Guidelines point to the standards established in the 2010 Horizontal Merger Guidelines for how the agencies will evaluate parties' claims of efficiencies for mergers.27 As the Draft Guidelines note, vertical mergers combine firms with complementary roles and eliminate inefficiencies from contracting between businesses at different levels of the distribution chain. Such mergers may generate efficiencies in production, management, and distribution.28 Agencies will not challenge a merger if its cognizable efficiencies are of a type and size such that the merger the merger will not likely be anticompetitive.29
Three FTC Commissioners Issue Separate Statements
Commissioner Christine Wilson, who voted in support of the Draft Guidelines, issued a statement concurring with the release of the Draft Guidelines, and calling for public commentary on particular issues, including:
- whether the Draft Guidelines' approach to EDM should be aligned more closely with economic literature on the subject, which recognizes benefits from EDM that cannot be achieved by separate firms;
- whether the final guidelines should limit antitrust scrutiny to oligopolistic markets and include a safe harbor for vertical mergers in "relatively unconcentrated" markets; and
- what level of anticompetitive effects should be presumed de minimis in merger analysis given the likely benefits of EDM and vertical efficiencies.30
Both Democratic FTC commissioners abstained from the vote to release the Draft Guidelines and submit them to public comment. They agreed that the 1984 Guidelines are out of date and should be rescinded, but expressed disagreement with certain aspects of the Draft Guidelines' presentation of the issues.
Commissioner Rebecca Kelly Slaughter's statement critiques several provisions in the Draft Guidelines. This includes:
- criticizing the Draft Guidelines' 20 percent thresholds for market share or use in the relevant market as lacking empirical support;31
- noting that the proposed 20 percent safe harbor is not coupled with corresponding guidelines regarding when a merger is likely to warrant closer examination or enforcement;32 and
- suggesting that the Draft Guidelines' language requires too much certainty regarding potential anticompetitive effects to warrant scrutiny or enforcement, where more probabilistic language about anticompetitive effects would be preferable and consistent with established law.33
Commissioner Rohit Chopra's statement calls for further study of prior enforcement matters and the potential anticompetitive harms resulting from past unchallenged vertical mergers.34 Commissioner Chopra also calls for the theoretical assertions in the Draft Guidelines to be tested against economic realities, and for inclusion of a broader set of theories of anticompetitive harm, including the potential for a vertical merger to enable regulatory evasion, a frequently discussed competitive effect of vertical mergers.35 Regulatory evasion may occur where a firm subject to rate regulation merges with a vertically related firm that provides inputs, then raises its prices above the regulated cap by internally inflating the price of the input and passing on the increased price to consumers as a "legitimate" cost. In doing so, a firm may "evade" the rate regulation and charge higher prices to consumers.
Conclusion
While the Draft Guidelines identify significant issues in the debates over the appropriate law and policy for vertical mergers, the document omits some topics that have received significant attention. Notably, the Draft Guidelines do not address the much-discussed issue of acquisition of nascent competitors via vertical mergers. This theory suggests that entrenched firms may purchase firms identified as potential future competitors to prevent them from entering the market later, harming nascent competition.36
While the Draft Guidelines represent only one stage in the development of the debates over the law and economics of vertical mergers, they provide insight into the issues the agencies currently find most worthy of discussion and most likely to guide their analysis going forward. The period for public comment on the Draft Guidelines is open until February 11, 2020.37
[1] U.S. Department of Justice & Federal Trade Commission, Draft Vertical Merger Guidelines, January 10, 2020 [hereinafter “Draft Guidelines”], available at https://www.ftc.gov/system/files/documents/public_statements/1561715/p810034verticalmergerguidelinesdraft.pdf.
[2] See Federal Trade Commission “FTC and DOJ Announce Draft Vertical Merger Guidelines for Public Comment,” January 10, 2020, available at https://www.ftc.gov/news-events/press-releases/2020/01/ftc-doj-announce-draft-vertical-merger-guidelines-public-comment.
[3] Draft Guidelines, n. 1.
[4] Draft Guidelines, § 2.
[5] U.S. Department of Justice & Federal Trade Commission, “Horizontal Merger Guidelines of the United States Department of Justice and the Federal Trade Commission,” August 19, 2010, available at https://www.ftc.gov/public-statements/2010/08/horizontal-merger-guidelines-united-states-department-justice-federal.
[6] Draft Guidelines, § 2.
[7] Id.
[8] Id.
[9] Id., § 3.
[10] Id.
[11] Id.
[12] Id., § 4. See also 2010 Horizontal Merger Guidelines, supra note 5, §§ 2.1-2.2.
[13] Id.
[14] Id., § 5.a.
[15] Id.
[16] Id.
[17] Id., § 5.b.
[18] Id.
[19] See Federal Trade Commission, “FTC Imposes Conditions on Staples’ Acquisition of Office Supply Wholesaler Essendant Inc.,” January 28, 2019, available at https://www.ftc.gov/news-events/press-releases/2019/01/ftc-imposes-conditions-staples-acquisition-office-supply.
[20] Federal Trade Commission, In the Matter of Sycamore Partners II, L.P., Staples, Inc. and Essendant Inc., Docket No. C-4667, Decision and Order, Jan. 19, 2019, §2 , available at https://www.ftc.gov/system/files/documents/cases/1810180_staples_essendant_do_and_apps_a-g-redacted_public_version.pdf.
[21] Draft Guidelines, § 7.
[22] Id. See also 2010 Horizontal Merger Guidelines, supra note 5, at §§ 7.1-7.2.
[23] Id.
[24] Id.
[25] Id., § 6.
[26] Id.
[27] Id., § 9. See also 2010 Horizontal Merger Guidelines, supra note 5, § 10.
[28] Id.
[29] Id.
[30] Federal Trade Commission, “Concurring Statement of Commissioner Christine S. Wilson Concerning the Publication of FTC-DOJ Draft Vertical Merger Guidelines for Public Comment,” January 10, 2020, available at https://www.ftc.gov/system/files/documents/public_statements/1561709/p810034wilsonvmgconcur.pdf.
[31] Federal Trade Commission, “Statement of Rebecca Kelly Slaughter on the FTC-DOJ Draft Vertical Merger Guidelines,” January 10, 2020, at 3, available at https://www.ftc.gov/system/files/documents/public_statements/1561721/p810034slaughtervmgabstain.pdf.
[32] Id.
[33] Id. at 3-4.
[34] Federal Trade Commission, “Statement of Commissioner Rohit Chopra Regarding the Request for Comment on Vertical Merger Guidelines,” January 10, 2020, at 4, available at https://www.ftc.gov/system/files/documents/public_statements/1561727/p810034chopravmgabstain.pdf.
[35] Id. at 4, 6.
[36] For an overview of nascent competition issues, see Competition in Digital Technology Markets: Examining Acquisitions of Nascent or Potential Competitors by Digital Platforms, Hearing before the Subcomm. on Antitrust, Competition Policy, and Consumer Rights, U.S. Senate Committee on the Judiciary, 116 Cong. (2019). Statement of Professor John Yun at 2, available at https://www.judiciary.senate.gov/imo/media/doc/Yun%20Testimony.pdf.
[37] See “FTC and DOJ Announce Draft Vertical Merger Guidelines for Public Comment,” supra note 2.
