On June 30, 2020, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) finalized their much-anticipated Vertical Merger Guidelines. The new Guidelines, which were last updated in 1984, seek to increase transparency around the analytical techniques, practices, and enforcement policies that U.S. antitrust authorities use to regulate mergers between firms at different stages of the supply chain (e.g., a furniture maker that acquires a producer of timber).
Vertical mergers generally raise fewer anticompetitive concerns than horizontal mergers between direct competitors. This, in part, is because consolidation along the supply chain tends to result in lower prices, as distributors and finished goods manufacturers can source inputs at cost rather than at the markup they would pay to a third-party supplier. But, as the Guidelines make clear, vertical mergers “are not invariably innocuous”: a merged firm could raise the price for – and even withhold – a necessary input from its rivals or exploit sensitive business information about rivals that it obtains as part of the merger. These so-called unilateral effects threaten harm to competition in the relevant market if rivals wind up abandoning the market, leaving consumers with higher prices and less innovation as a result.
Per the Guidelines, DOJ and FTC evaluate the extent to which a vertical merger will raise rivals’ costs or foreclose rivals from the market by analyzing the merged firm’s ability and incentive to disadvantage rivals. If rivals can switch to alternative suppliers, then the ability of the merged firm to restrict supply is less concerning and the effect on competition likely negligible. Similarly, if the merged firm does not stand to benefit from reduced competition (because, for instance, the loss in upstream sales is greater than its increase in downstream sales), then it has little incentive to foreclose rivals or raise their costs, meaning that the market likely will remain competitive.
The Guidelines also contain a section on “procompetitive effects,” which outlines the way in which DOJ and FTC assess the potential efficiencies from vertical mergers that benefit competition and consumers. Indeed, mergers involving assets at different points in the supply chain can streamline the production process, enhance inventory management and distribution, and aid innovation, as the Guidelines point out. In most cases, however, the biggest cost-saving comes from a merged firm’s ability to self-supply inputs that otherwise would have been purchased from an independent supplier. The Guidelines require merging firms to substantiate the extent of this cost-savings, which DOJ and FTC will then verify.
The final Guidelines look much like the draft that was released for public comment back in January. One notable difference, however, is the removal of a 20 percent market share threshold below which a vertical merger is unlikely to be challenged. Commenters evidently split over whether this hard-and-fast number was too low (overly meddlesome) or too high (overly permissive), and thus it was left out of the final Guidelines.
Time will tell, but it appears that the issuance of the Vertical Merger Guidelines signals less a shift in merger review policy and is more an effort to memorialize for all interested parties – firms, practitioners, and enforcers – how vertical mergers are reviewed. One thing is clear: DOJ’s and FTC’s oft-cited Horizontal Merger Guidelines now have a proper counterpart.