[co-author: Stacy Ruegilin]
On June 30, 2020, the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) (the Agencies) issued new guidelines governing for vertical mergers and acquisitions.1 The Guidelines replace and supersede the DOJ's 1984 Non-Horizontal Merger Guidelines2 and follow an earlier draft the Agencies issued for public comment on January 10, 2020.3
The Guidelines differ from the earlier draft in several key areas, adopting several compromise positions. First, the Guidelines omit an earlier reference to a quasi-safe harbor granted if the relevant market shares are below 20 percent. Second, the Guidelines discuss elimination of double marginalization (EDM) in several places, whereas the draft had included a stand-alone section on the topic.4 Third, the Guidelines explicitly cover certain non-vertical relationships, including products that are complements and parties that are in diagonal relationships. Finally, the Guidelines contain additional and more specific anticompetitive harms, including theories involving two-level entry and heightened distribution costs.
The new Guidelines are not intended to provide numeric specificity and do not do so. Rather, the aim is to explain the way in which the Agencies approach these transactions. The main value of the Guidelines is in their descriptions of harms and benefits they view as relevant. The Guidelines are useful in alerting companies as to the types of vertical mergers that may be looked at, but do not—and are not intended to—tell us what the outcomes will be.
Market Definition, Related Products, Market Shares, and Concentration
The Guidelines describe the Agencies' approach to defining one or more relevant markets for the purpose of evaluating a vertical merger.5 These largely conform with the Agencies' Horizontal Merger Guidelines, but also include identification of one or more "related products" that is "supplied or controlled by the merged firm and is positioned vertically or is complementary to the products and services in the relevant market."6
The Guidelines dispose of an earlier proposed discussion of the outcome when the merging parties have less than 20 percent share in the relevant market and the related product is used in less than 20 percent of the relevant market.7 It was unclear whether this was meant to be a safe harbor or simply a reference point. Most observers took it to mean a very loose safe harbor. As revised, the Guidelines state more generally that the Agencies "may consider measures of market shares and market concentration" in analyzing competitive effects without making reference to any specific market share or concentration threshold. This decision likely reflects a compromise, as some had argued the 20 percent threshold was too low and others had argued it was too high.8
The Guidelines discuss two common types of unilateral effects that may arise from vertical mergers: 1) foreclosure and raising rivals' costs; and 2) use of competitively sensitive information.9 The Agencies will analyze whether the merged firm will have the ability and incentive to unilaterally alter its terms of dealing to cause rivals to lose significant sales or compete less aggressively. The Guidelines also specify that the Agencies will consider "the likely net effect" of the merged firm's unilateral conduct on competition and will consider countervailing effects, including EDM.10 The Agencies will balance each of these potential harms against any offsetting benefits, including evidence that the merged firm will achieve EDM and pass through some of the resulting cost savings.
The Guidelines also expand (particularly relative to the 1984 version) the list of potential harms related to vertical and other non-horizontal mergers (i.e., complements and diagonal mergers), including:
- Foreclosure and raising rivals' costs, either upstream or downstream—Whether the merger will give the merged firm the ability to profitably increase prices or restrict supply of an upstream or downstream input used by rival producers, including by gaining greater bargaining leverage.
- Creating the need for two-level entry—Whether the merger would cause any competitors seeking to compete with one merging firm to enter the market at two different levels (e.g., at the supplier and manufacturer levels) because the merging parties are each dominant at their levels.
- Foreclosure and raising rivals' costs in complements or diagonal merger—Whether the merged firm would have the ability or incentive i) to disadvantage rivals, increasing the price of related products to customers that do not buy its primary products, or ii) to increase the cost or decrease the quality of the diagonal product in another market or pull it from the market altogether.
- Access to competitively sensitive information—Whether the merged firm can use access to a rival's competitively sensitive information to moderate its competitive response to its rival's competitive actions.11
The Guidelines also mention coordinated effects, adopting the same approach used in the 2010 Horizontal Merger Guidelines and providing an example.12
The Guidelines explicitly recognize that vertical mergers can generate cognizable, merger-specific efficiencies, including EDM, which should be assessed in a manner consistent with Section 10 of the Horizontal Merger Guidelines.13 In principle, merging parties are required to substantiate the claims that they will benefit from the EDM, but the Agencies may independently quantify EDM effects and consider evidence of cost savings. In addition, the Guidelines state that the Agencies will assess the merger specificity of EDM by examining various factors such as the parties' existing contracting practices and other similarly situated firms in the same industry.14
Partisan Split and Substantive Controversies
The FTC vote to issue the Vertical Merger Guidelines was 3-2, with both Democratic commissioners dissenting. The joint statement by the three Republican commissioners emphasized the value of providing an accurate view of how the Agencies actually assess vertical mergers today.15 The dissents argued that the Agencies should have embraced additional theories of harm, taken a more skeptical view of any claimed efficiencies, and afforded the public a second round of comments.16 Given the partisan split in the vote and the contested nature of some of the core topics, such as EDM, it remains to be seen whether these Guidelines will last anywhere near as long as the now-superseded 1984 version.
 U.S. Department of Justice & Federal Trade Commission, Vertical Merger Guidelines, June 30, 2020 [hereinafter “Final Guidelines”], https://www.ftc.gov/system/files/documents/reports/us-department-justice-federal-trade-commission-vertical-merger-guidelines/vertical_merger_guidelines_6-30-20.pdf.
 Final Guidelines n.1.
 See Federal Trade Commission “FTC and DOJ Announce Draft Vertical Merger Guidelines for Public Comment,” January 10, 2020, https://www.ftc.gov/news-events/press-releases/2020/01/ftc-doj-announce-draft-vertical-merger-guidelines-public-comment; U.S. Department of Justice & Federal Trade Commission, Draft Vertical Merger Guidelines, January 10, 2020 [hereinafter “Draft Guidelines”], https://www.ftc.gov/system/files/documents/public_statements/1561715/p810034verticalmergerguidelinesdraft.pdf.
 This change may reflect in part Commissioner Wilson’s consistent assertion that EDM should be addressed in the unilateral effects section. See Comm’r Christine S. Wilson Speech, Reflection of the 2020 Draft Vertical Merger Guidelines and Comments from Stakeholders, at 6-7 (Mar. 11, 2020). See also Statement of Chairman Joseph Simons, Comm’r Noah Joshua Phillips, and Comm’r Christine S. Wilson Regarding Joint Dep’t of Justice and Fed. Trade Comm. Vertical Merger Guidelines (Jun. 30, 2020) at 2, https://www.ftc.gov/system/files/documents/public_statements/1577507/vmgmajoritystatement.pdf.
 Final Guidelines § 3.
 Draft Guidelines § 3.
 See Statement of Rebecca Kelly Slaughter on the FTC-DOJ Draft Vertical Merger Guidelines (Jan. 10, 2020), at 3, https://www.ftc.gov/system/files/documents/public_statements/1561721/p810034slaughtervmgabstain.pdf (too high); Concurring Statement of Christine S. Wilson Publication of FTC-DOJ Draft Vertical Merger Guidelines for Public Comment (Jan. 10, 2020), n.10, https://www.ftc.gov/system/files/documents/public_statements/1561709/p810034wilsonvmgconcur.pdf (too low).
 Final Guidelines § 4.
 Final Guidelines § 4.
 This section reflects the FTC’s position taken in its recent Staples/Essendant enforcement action where it imposed a firewall that blocked Staples from accessing certain information about its rivals held by Essendant. See Federal Trade Commission, “FTC Imposes Conditions on Staples’ Acquisition of Office Supply Wholesaler Essendant Inc.” (Jan. 28, 2019), https://www.ftc.gov/news-events/press-releases/2019/01/ftc-imposes-conditions-staples-acquisition-office-supply.
 Final Guidelines § 5.
 Id. § 6.
 Some public comments to the draft Guidelines heavily criticized the unclear approach to EDM, largely because the draft Guidelines did not address presumptions or merger-specificity. See e.g., Koren Wong-Ervin, U.S. Vertical Merger Guidelines, Recommendations and Thoughts on EDM and Merger Specificity (Jan. 22, 2020), https://www.competitionpolicyinternational.com/u-s-vertical-merger-guidelines-recommendations-and-thoughts-on-edm-and-merger-specificity/. Also, some economists argued that EDM in general is not a necessary consequence of vertical integration. See e.g., Martin Gaynor, Comments on Draft Vertical Merger Guidelines (Feb. 26, 2020), https://www.ftc.gov/system/files/attachments/798-draft-vertical-merger-guidelines/gaynor_comment_vmg_feb_26_2020.pdf.
 Statement of Chairman Joseph Simons, Comm’r Noah Joshua Phillips, and Comm’r Christine S. Wilson Regarding Joint Dep’t of Justice and Fed. Trade Comm. Vertical Merger Guidelines (Jun. 30, 2020), https://www.ftc.gov/system/files/documents/public_statements/1577507/vmgmajoritystatement.pdf.
 See Dissenting Statement of Comm’r Rohit Chopra Regarding the Publication of Vertical Merger Guidelines, Commission File No. P810034 (Jun. 30, 2020), https://www.ftc.gov/system/files/documents/public_statements/1577503/vmgchopradissent.pdf; Dissenting Statement of Comm’r Rebecca Kelly Slaughter In re FTC-DOJ Vertical Merger Guidelines, Commission File No. P810034 (Jun. 30, 2020), https://www.ftc.gov/system/files/documents/public_statements/1577499/vmgslaughterdissent.pdf.