The U.S. Department of Justice and Federal Trade Commission on June 30, 2020, published in final form the agencies’ Vertical Merger Guidelines (Vertical Guidelines). They are designed to increase the transparency of the agencies' analysis of mergers and acquisitions between firms that operate at different stages of the supply chain—for example, a manufacturer of finished products’ acquisition of a vendor of components incorporated in those products. The Vertical Guidelines are modeled after and explicitly linked to the analysis included in the agencies' 2010 Horizontal Merger Guidelines.
The Vertical Guidelines reflect the agencies' current analysis and do not signal increased enforcement against vertical mergers. But, because the final version eliminates the 20% safe harbor included in the agencies’ January 2020 draft guidelines, they provide little certainty for firms contemplating vertical transactions.
Building on the traditional antitrust concept of "relevant product market," the Vertical Guidelines introduce the concept of a "related product," which is a product or service vertically related to the product in the relevant market. For example, a component sold to manufacturer A by component vendor B and incorporated in A's finished product would be a "related product."
The Vertical Guidelines recognize that vertical mergers can have anticompetitive effects. For example, the post-merger firm could refuse to provide the related product (here the component) to manufacturer A's rivals, thus foreclosing them from the market. Alternatively, the post-merger firm could offer the component to A’s rivals at a higher price, thus raising their costs.
Acquisition by manufacturer A of vendor B may also provide access to confidential business information about vendor B's other customers, including manufacturer A's competitors. Access to this information may permit manufacturer A to coordinate its pricing of finished products with those of its competitors.
The Vertical Guidelines also recognize, however, the potential procompetitive benefits of vertical mergers, primarily the elimination of “double marginalization.” This is a phenomenon that occurs when, in our example, both manufacturer A and vendor B have each been charging a profit maximizing price. The post-merger consolidation of margins may eliminate this double marginalization and provide an opportunity for the post-merger firm to lower the prices of A’s finished products.
Whether the reviewing agency will challenge a specific transaction has traditionally been entirely a fact-specific determination, rather than one based primarily on economic assumptions. As discussed below, that will not change.
Elimination of Proposed 20% Safe Harbor
The draft guidelines issued in January provided the agencies would generally not challenge transactions where each merging firm had less than a 20% share of its respective market. Returning to our example, assume manufacturer A represents 25% of sales in the finished product market. Vendor B has historically accounted for only 15% of the supply of components to the manufacturers in that market. Although, with a 25% share, manufacturer A has a "competitively significant share," vendor B represents less than 20% of the components sold to A and its rivals. Because vendor B's sales to the manufacturers as a group are not "sufficiently competitively significant,” the agencies would have been unlikely to challenge the transaction.
Without explanation, the new guidelines eliminate this 20% safe harbor. Thus, any legal certainty attendant to quantitative guidelines has been lost. The agencies are likely to publish a commentary on this and other changes from the January 2020 draft within the near future.
The guidelines signal neither more nor less enforcement in vertical mergers. Although vertical mergers will continue to be scrutinized by the agencies, mergers between vertically related firms that have insubstantial shares of their product markets are unlikely to be challenged.