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New Federal Monopoly Standards Do Not Pass Go

Updated DOJ and FTC Vertical Merger Guidelines are Fatally Flawed

By Alex Harman

At the beginning of this year, the Department of Justice Antitrust Division and the Federal Trade Commission issued Draft Vertical Merger Guidelines. While this might seem like a hyper-technical endeavor, it became the latest battlefield in the effort to reinvigorate antitrust enforcement in a highly concentrated corporate economy.

Why should you care about this? Put simply, the massive consolidation and concentration we have seen across all sectors of the economy over the past several decades can be traced to a failure of the government to enforce the antitrust laws put in place to prevent monopolies, and economists who have convinced courts that concentration does not harm consumers. As a result, we have seen fewer choices, less innovation, and lower wages for workers. This is especially true with vertical mergers because they make it ever more difficult for potential competitors to enter a market.

Wait! What is a vertical merger? A vertical merger, or non-horizontal merger, is a merger of two or more companies that operate at different parts of the supply chain. This is in contrast to a horizontal merger which typically involves two competitors. A horizontal merger is two hamburger chains merging, and a vertical merger is a hamburger chain buying a cattle farm.

The draft guidelines sought to update a document that serves as a set of recommendations and guidelines for antitrust enforcers to use when determining if a merger should be blocked or challenged. The Vertical Merger Guidelines had not been updated since 1984, and because they start with the assumption that vertical mergers are harmless, there have been few challenges brought under these guidelines. However, even when the government has sought to block a vertical merger, courts have called the outdated guidelines a “helpful tool” and continued to rely on them.

The announcement of the draft guidelines included a short period for individuals and organizations to submit comments about the proposed changes, as well as a series of workshops where commenters could discuss concerns and views with agency officials. Public Citizen filed a comment with several other public interest groups. However, due to COVID-19, the planned workshops were cut short, and no further comments were invited.

Yesterday, the final Vertical Merger Guidelines were issued. While a few improvements from the draft were made, the guidelines are flawed and disappointing.

Public Citizen, and other commenters, raised problems with the draft guidelines that were addressed in the final guidelines. These included an unnecessary safe harbor proposal that would have given a pass to a large number of vertical mergers which was cut from the final version. The final guidelines added back in a part of the 1984 guidelines that had been left out related to “two-level entry,” a type of harm caused by vertical mergers where a potential competitor is forced to enter a business on two levels simultaneously, for example it would be very difficult to compete with a giant online retailer if you did not also have a large network of warehouses and delivery trucks.

In other areas the final guidelines went in a worse direction than the draft.

For example, the discussion of elimination of double marginalization (EDM). EDM is a controversial economic theory that states that if two companies each make a profit (margin) and they combine, they will have an incentive to eliminate the double profit and pass the savings on to consumers. The draft guidelines included a discussion on the potential benefits of EDM that has been expanded in the final guidelines to be an integrated part of the evaluation of vertical mergers throughout the guidelines, rather than a single factor to be considered when relevant.  In our comment, we wrote that EDM is speculative and unproven and should not be a factor in the guidelines at all. However, if EDM is included as a factor, it should be less prescriptive, and not used to balance against potential anticompetitive harms of a merger. It is disappointing that EDM has been elevated in importance in the final guidelines.

The guidelines also perpetuate the false presumption that vertical mergers are procompetitive and harmless. The whole purpose of the guidelines is to guide enforcement attorneys on if and when they should challenge a harmful and anticompetitive merger. It is counterproductive to repeatedly assert that vertical mergers are beneficial in a document where that is not relevant, and, as Commissioner Slaughter wrote in her dissent, could actually be used by merging parties “to argue that the investigation itself is inappropriate” when the agencies do seek to block a vertical merger.

The guidelines fail to recognize how corporations now use data they collect on consumers as a factor when seeking to merge, or how data can be used by companies to make decisions about mergers that give them an anticompetitive advantage. Commissioner Chopra raised this issue in his statement on the draft guidelines in January and we echoed his concerns in our comment. This is a problem.

Finally, the process here was unnecessarily flawed. Updating the guidelines was an important effort and these new guidelines are better than the outdated 1984 guidelines. But after nearly 40 years, getting this done right is more important that getting it done quickly. A more thoughtful approach would have provided additional opportunities for commenters to address specific questions and concerns rather than this rush to finish.

The purpose of guidelines is to help antitrust enforcers present investigations in court, but the guidelines issued this week undermine that goal in a hypocritical and cynical way. They continue to make the failed arguments of yesterday that vertical mergers are harmless, or even beneficial, and do nothing to help stop the increasingly complex and dangerous mergers of tomorrow.