On January 10, 2020, the Federal Trade Commission (FTC) and Department of Justice Antitrust Division (DOJ) released for public comment draft Vertical Merger Guidelines. Vertical mergers are those that combine companies operating at different stages of the supply chain. These guidelines would replace DOJ’s Non-Horizontal Merger Guidelines from 1984. The draft Vertical Merger Guidelines state that they are meant to “outline the principal analytical techniques, practices and enforcement policy” of the FTC and DOJ with regard to vertical mergers. According to the draft guidelines, they are intended to “increas[e] the transparency of the analytical process underlying the Agencies’ enforcement decisions” and thereby assist the business community and antitrust practitioners.
The draft Vertical Merger Guidelines state that they are to be read in conjunction with the FTC’s and DOJ’s 2010 Horizontal Merger Guidelines, and note that the principles and analytical frameworks that the agencies use in assessing horizontal mergers apply as well to vertical mergers. Such principles from the 2010 Horizontal Merger Guidelines include market definition, the analytical framework for evaluating entry considerations, the treatment of acquiring a failing firm, and acquisitions of partial ownership. The draft Vertical Merger Guidelines note, though, that vertical mergers raise “distinct considerations” addressed in the draft Vertical Merger Guidelines.
Among the points addressed in the draft guidelines are:
- Relevant Markets and Related Products: The draft guidelines state that, in an enforcement action regarding a vertical merger, the FTC or DOJ normally will identify one or more relevant markets in which the transaction may substantially lessen competition. The draft guidelines also note that the FTC or DOJ will identify one or more “related products” – “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.” The draft guidelines give as examples of such related products “an input, a means of distribution, or access to a set of customers.”
- Market Share: The draft guidelines discuss the role of market share, including a statement that “[t]he Agencies are unlikely to challenge a vertical merger where the parties to the merger 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.” However, the draft guidelines explain that mergers below this threshold can give rise to concerns in certain circumstances and that exceeding this threshold “does not, on its own, support an inference that the vertical merger is likely to substantially lessen competition.”
- Unilateral Effects: The draft guidelines address ways in which a vertical merger may reduce competition through unilateral effects. The draft guidelines note that a vertical merger can reduce competition by making it profitable for the combined firm to foreclose rivals by denying access to a related product or by allowing the combined firm to raise rivals’ costs or decrease the quality of the products or services of their rivals. The draft guidelines also identify potential competitive concerns arising from access to and control of sensitive business information belonging to a rival.
- Double Marginalization: The draft guidelines discuss the “[e]limination of double marginalization,” a situation in which a vertical merger may make a price reduction profitable to the benefit of the merged firm and the downstream buyers of products or services. The draft guidelines provide that the FTC and DOJ “generally rely on the parties to identify and demonstrate whether and how the merger eliminates double marginalization,” but that they “will not challenge a merger if the net effect of elimination of double marginalization means the merger is unlikely to be anticompetitive in any relevant market.”
- Coordinated Effects: The draft guidelines state that vertical mergers may diminish competition through coordinated effects. The draft guidelines note that a vertical merger may increase the vulnerability of a market to coordination by “eliminating or hobbling a maverick.” The draft guidelines also note that coordinated effects can arise in other ways, such as through changes in market structure or access to confidential information of rivals.
- Efficiencies: The draft guidelines recognize that vertical mergers “have the potential to create cognizable efficiencies,” and state that efficiencies will be evaluated under the approach set forth in the 2010 Horizontal Merger Guidelines.
- Examples: The draft guidelines include a number of examples that the agencies believe should provide more clarity on their analytical approach.
One topic that is not addressed in these draft guidelines is the agencies’ approach to remedies in vertical mergers (e.g., when conduct remedies may be appropriate). This is an important issue for the business community and antitrust practitioners.
While these draft guidelines were jointly issued by the FTC and DOJ, the FTC’s two Democratic commissioners abstained from the FTC’s vote to issue these guidelines. These two commissioners each issued a separate statement agreeing that the 1984 Non-Horizontal Merger Guidelines should be rescinded but raising concerns about the draft guidelines as proposed.
These draft guidelines are subject to a 30-day public comment period. Accordingly, the FTC and DOJ may revise these draft guidelines following the receipt of input from this comment period.
