Last Thursday and Friday, Truth on the Market hosted a symposium analyzing the Draft Vertical Merger Guidelines from the FTC and DOJ. The relatively short draft guidelines provided ample opportunity for discussion, as evidenced by the stellar roster of authors thoughtfully weighing in on the topic.
We want to thank all of the participants for their excellent contributions. All of the posts are collected here, and below I briefly summarize each in turn.
Symposium Day 1
Hovenkamp views the draft guidelines as a largely positive development for the state of antitrust enforcement. Beginning with an observation — as was common among participants in the symposium — that the existing guidelines are outdated, Hovenkamp believes that the inclusion of 20% thresholds for market share and related product use represent a reasonable middle position between the extremes of zealous antitrust enforcement and non-enforcement.
Hovenkamp also observes that, despite their relative brevity, the draft guidelines contain much by way of reference to the 2010 Horizontal Merger Guidelines. Ultimately Hovenkamp believes that, despite the relative lack of detail in some respects, the draft guidelines are an important step in elaborating the “economic approaches that the agencies take toward merger analysis, one in which direct estimates play a larger role, with a comparatively reduced role for more traditional approaches depending on market definition and market share.”
Finally, he notes that, while the draft guidelines leave the current burden of proof in the hands of challengers, the presumption that vertical mergers are “invariably benign, particularly in highly concentrated markets or where the products in question are differentiated” has been weakened.
Neuchterlein finds it hard to square elements of the draft vertical merger guidelines with both the past forty years of US enforcement policy as well as the empirical work confirming the largely beneficial nature of vertical mergers. Related to this, the draft guidelines lack genuine limiting principles when describing speculative theories of harm. Without better specificity, the draft guidelines will do little as a source of practical guidance.
One criticism from Neuchterlein is that the draft guidelines blur the distinction between “harm to competition” and “harm to competitors” by, for example, focusing on changes to rivals’ access to inputs and lost sales.
Neuchterlein also takes issue with what he characterizes as the “arbitrarily low” 20 percent thresholds. In particular, he finds the fact that the two separate 20 percent thresholds (relevant market and related product) being linked leads to a too-small set of situations in which firms might qualify for the safe harbor. Instead, by linking the two thresholds, he believes the provision does more to facilitate the agencies’ discretion, and little to provide clarity to firms and consumers.
While Kolasky and Giordano believe that the 1984 guidelines are badly outdated, they also believe that the draft guidelines fail to recognize important efficiencies, and fail to give sufficiently clear standards for challenging vertical mergers.
By contrast, Kolasky and Giordano believe that the 2008 EU vertical merger guidelines provide much greater specificity and, in some cases, the 1984 guidelines were better aligned with the 2008 EU guidelines. Losing that specificity in the new draft guidelines sets back the standards. As such, they recommend that the DOJ and FTC adopt the EU vertical merger guidelines as a model for the US.
To take one example, the draft guidelines lose some of the important economic distinctions between vertical and horizontal mergers and need to be clarified, in particular with respect to burdens of proof related to efficiencies. The EU guidelines also provide superior guidance on how to distinguish between a firm’s ability and its incentive to raise rivals’ costs.
Slade welcomes the new draft guidelines and finds them to be a good effort, if in need of some refinement. She believes the agencies were correct to defer to the 2010 Horizontal Merger Guidelines for the the conceptual foundations of market definition and concentration, but believes that the 20 percent thresholds don’t reveal enough information. She believes that it would be helpful “to have a list of factors that could be used to determine which mergers that fall below those thresholds are more likely to be investigated, and vice versa.”
Slade also takes issue with the way the draft guidelines deal with EDM. Although she does not believe that EDM should always be automatically assumed, the guidelines do not offer enough detail to determine the cases where it should not be.
For Slade, the guidelines also fail to include a wide range of efficiencies that can arise from vertical integration. For instance “organizational efficiencies, such as mitigating contracting, holdup, and renegotiation costs, facilitating specific investments in physical and human capital, and providing appropriate incentives within firms” are important considerations that the draft guidelines should acknowledge.
Slade also advises caution when simulating vertical mergers. They are much more complex than horizontal simulations, which means that “vertical merger simulations have to be carefully crafted to fit the markets that are susceptible to foreclosure and that a one-size-fits-all model can be very misleading.”
Wright et al. commend the agencies for highlighting important analytical factors while avoiding “untested merger assessment tools or theories of harm.”
They do, however, offer some points for improvement. First, EDM should be clearly incorporated into the unilateral effects analysis. The way the draft guidelines are currently structured improperly leaves the role of EDM in a sort of “limbo” between effects analysis and efficiencies analysis that could confuse courts and lead to an incomplete and unbalanced assessment of unilateral effects.
Second, Wright et al. also argue that the 20 percent thresholds in the draft guidelines do not have any basis in evidence or theory, nor are they of “any particular importance to predicting competitive effects.”
Third, by abandoning the 1984 guidelines’ acknowledgement of the generally beneficial effects of vertical mergers, the draft guidelines reject the weight of modern antitrust literature and fail to recognize “the empirical reality that vertical relationships are generally procompetitive or neutral.”
Finally, the draft guidelines should be more specific in recognizing that there are transaction costs associated with integration via contract. Properly conceived, the guidelines should more readily recognize that efficiencies arising from integration via merger are cognizable and merger specific.
A key criticism offered by Werden and Froeb in their post is that “the proposed Guidelines do not set out conditions necessary or sufficient for the agencies to conclude that a merger likely would substantially lessen competition.” The draft guidelines refer to factors the agencies may consider as part of their deliberation, but ultimately do not give an indication as to how those different factors will be weighed.
Further, Werden and Froeb believe that the draft guidelines fail even to communicate how the agencies generally view the competitive process — in particular, how the agencies’ views regard the critical differences between horizontal and vertical mergers.
Jacobson and Edelson begin with an acknowledgement that the guidelines are outdated and that there is a dearth of useful case law, thus leading to a need for clarified rules. Unfortunately, they do not feel that the current draft guidelines do nearly enough to satisfy this need for clarification.
Generally positive about the 20% thresholds in the draft guidelines, Jacobson and Edelson nonetheless feel that this “loose safe harbor” leaves some problematic ambiguity. For example, the draft guidelines endorse a unilateral foreclosure theory of harm, but leave unspecified what actually qualifies as a harm. Also, while the Baker Hughes burden shifting framework is widely accepted, the guidelines fail to specify how burdens should be allocated in vertical merger cases.
The draft guidelines also miss an important opportunity to specify whether or not EDM should be presumed to exist in vertical mergers, and whether it should be presumptively credited as merger-specific.
Symposium Day 2
Brennan’s post focused on what he referred to as “pure” vertical mergers that do not include concerns about expansion into upstream or downstream markets. Brennan notes the highly complex nature of speculative theories of vertical harms that can arise from vertical mergers. Consequently, he concludes that, with respect to blocking pure vertical mergers,
“[I]t is not clear that we are better off expending the resources to see whether something is bad, rather than accepting the cost of error from adopting imperfect rules — even rules that imply strict enforcement. Pure vertical merger may be an example of something that we might just want to leave be.”
Cernak’s post examines the absences and ambiguities in the draft guidelines as compared to the 1984 guidelines. He notes the absence of some theories of harm — for instance, the threat of regulatory evasion. And then moves on to point out the ambiguity in how the draft guidelines deal with pleading and proving EDM.
Specifically, the draft guidelines are unclear as to how EDM should be treated. Is EDM an affirmative defense, or is it a factor that agencies are required to include as part of their own analysis? In Cernak’s opinion, the agencies should be clearer on the point.
Fruits observes that the attempt of the draft guidelines to clarify how the Agencies think about mergers and competition actually demonstrates how complex markets, related products, and dynamic competition actually are.
Fruits goes on to describe how the nature of assumptions necessary to support the speculative theories of harm that the draft guidelines may rely upon are vulnerable to change. Ultimately, relying on such theories and strong assumptions may make market definition of even “obvious” markets and products a fraught exercise that devolves into a battle of experts.
Pozen et al. believe that the draft guidelines inadvisably move the US away from accepted international standards. The 20 percent threshold in the draft guidelines is “arbitrarily low” given the generally pro competitive nature of vertical combinations.
Instead, DOJ and the FTC should consider following the approaches taken by the EU, Japan and Chile by favoring a 30 percent threshold for challenges along with a post-merger HHI measure below 2000.
Sher and McDonald describe how the draft Vertical guidelines miss a valuable opportunity to clarify speculative theories harm based on “potential competition.”
In particular, the draft guidelines should address the literature that demonstrates that vertical acquisition of small tech firms by large tech firms is largely complementary and procompetitive. Large tech firms are good at process innovation and the smaller firms are good at product innovation leading to specialization and the realization of efficiencies through acquisition.
Further, innovation in tech markets is driven by commercialization and exit strategy. Acquisition has become an important way for investors and startups to profit from their innovation. Vertical merger policy that is biased against vertical acquisition threatens this ecosystem and the draft guidelines should be updated to reflect this reality.
Rybnicek notes the common calls to withdraw the 1984 Non-Horizontal Merger Guidelines, but is skeptical that replacing them will be beneficial. Particularly, he believes there are major flaws in the draft guidelines that would lead to suboptimal merger policy at the Agencies.
One concern is that the draft guidelines could easily lead to the impression that vertical mergers are as likely to lead to harm as horizontal mergers. But that is false and easily refuted by economic evidence and logic. By focusing on vertical transactions more than the evidence suggests is necessary, the Agencies will waste resources and spend less time pursuing enforcement of actually anticompetitive transactions.
Rybicek also notes that, in addition to the 20 percent threshold “safe harbor” being economically unsound, they will likely create a problematic “sufficient condition” for enforcement.
Rybnicek believes that the draft guidelines minimize the significant role of EDM and efficiencies by pointing to the 2010 Horizontal Merger Guidelines for analytical guidance. In the horizontal context, efficiencies are exceedingly difficult to prove, and it is unwarranted to apply the same skeptical treatment of efficiencies in the vertical merger context.
Ultimately, Rybnicek concludes that the draft guidelines do little to advance an understanding of how the agencies will look at a vertical transaction, while also undermining the economics and theory that have guided antitrust law.
White believes that there is a gaping absence in the draft guidelines insofar as they lack an adequate market definition paradigm. White notes that markets need to be defined in a way that permits a determination of market power (or not) post-merger, but the guidelines refrain from recommending a vertical-specific method for drawing market definition.
Instead, the draft guidelines point to the 2010 Horizontal Merger Guidelines for a market definition paradigm. Unfortunately, that paradigm is inapplicable in the vertical merger context. The way that markets are defined in the horizontal and vertical contexts is very different. There is a significant chance that an improperly drawn market definition based on the Horizontal Guidelines could understate the risk of harm from a given vertical merger.
Manne & Stout believe that there is a great deal of ambiguity in the proposed guidelines that could lead either to uncertainty as to how the agencies will exercise their discretion, or, more troublingly, could lead courts to take seriously speculative theories of harm.
Among these, Manne & Stout believe that the Agencies should specifically address the alleged equivalence of integration via contract and integration via merger. They need to either repudiate this theory, or else more fully explain the extremely complex considerations that factor into different integration decisions for different firms.
In particular, there is no reason to presume in any given situation that the outcome from contracting would be the same as from merging, even where both are notionally feasible. It would be a categorical mistake for the draft guidelines to permit an inference that simply because an integration could be achieved by contract, it follows that integration by merger deserves greater scrutiny per se.
A whole host of efficiency and non-efficiency related goals are involved in a choice of integration methods. But adopting a presumption against integration via merger necessary leads to (1) an erroneous assumption that efficiencies are functionally achievable in both situations and (2) a more concerning creation of discretion in the hands of enforcers to discount the non-efficiency reasons for integration.
Therefore, the agencies should clarify in the draft guidelines that the mere possibility of integration via contract or the inability of merging parties to rigorously describe and quantify efficiencies does not condemn a proposed merger.
Manne & Stout begin by observing that, while Agencies have the opportunity to enforce in either the case of merger or contract, defendants can frequently only realize efficiencies in the case of merger. Therefore, calling for a contract/merger equivalency amounts to a preference for more enforcement per se, and is less solicitous of concerns about loss of procompetitive arrangements. Moreover, Manne & Stout point out that there is currently no empirical basis for justifying the weighting of enforcement so heavily against vertical mergers.
Manne & Stout further observe that vertical merger enforcement is more likely to thwart procompetitive than anticompetitive arrangements relative to the status quo ante because we lack fundamental knowledge about the effects of market structure and firm organization on innovation and dynamic competition.
Instead, the draft guidelines should adopt Williamson’s view of economic organizations: eschew the formal orthodox neoclassical economic lens in favor of organizational theory that focuses on complex contracts (including vertical mergers). Without this view, “We are more likely to miss it when mergers solve market inefficiencies, and more likely to see it when they impose static costs — even if the apparent costs actually represent a move from less efficient contractual arrangements to more efficient integration.”
Critically, Manne & Stout argue that the guidelines focus on market share thresholds leads to an overly narrow view of competition. Instead of looking at static market analyses, the Agencies should include a richer set of observations, including those that involve “organizational decisions made to facilitate the coordination of production and commercialization when they are dependent upon intangible assets.”
Ultimately Manne & Stout suggest that the draft guidelines should be clarified to guide the Agencies and courts away from applying inflexible, formalistic logic that will lead to suboptimal enforcement.