U.S. Vertical Merger Guidelines: Recommendations and Thoughts on EDM and Merger Specificity

Abstract

This article offers the following recommendations, focusing on #3 and 6: 1. Specifics on how the Agencies will implement the principles set forth in the Guidelines. The Guidelines state throughout that the Agencies “may consider” certain factors; this language should be revised to say “will” or “usually will” consider. 2. An explicit recognition that empirical evidence indicates that vertical mergers are generally procompetitive or benign and, as the Agencies have previously stated, “vertical mergers merit a stronger presumption of being efficient than do horizontal mergers.” 3. A clear statement that the government has the burden on EDM given that such calculations are part of the math of the raising rivals costs (RRC) argument and the two cannot be analyzed in isolation before evaluating their net effect. In other words, EDM can prevent RRC, not just net it out. The prima facie case should not, however, extend to netting the two out, but rather to showing that the merger is likely to result in RRC. 4. An explicit statement that the relevant inquiry for RRC is the effect on downstream competition and that raising the cost of an upstream input with no downstream effects does not warrant intervention. While examples in the Guidelines seem to suggest that the Agencies will follow this principle, an explicit statement would be helpful. 5. Explicitly requiring both the incentive and the ability to engage in anticompetitive conduct given that, without the ability there can be no harm, and lack of incentives is a strong indication that there are legitimate business reasons for the deal. 6. A recognition of the coordination problem presented by vertical dealing and that achieving EDM (and other efficiencies) through contracting presents challenges given the costly process of forming, administering, and enforcing contracts with independent suppliers. 7. Replacing the 20% market-share language with a clear safe harbor and increasing the relevant market share threshold (but not necessarily the “related product” threshold) from 20% to at least 30%.