Vertical Mergers and Input Foreclosure: Lessons from the AT&T/Time Warner Case

Abstract

This article offers a practical guide to analyzing vertical mergers using the general approach to input foreclosure and raising rivals’ costs described in the 2020 Vertical Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. The step-by-step analysis described here draws lessons from how that theory of harm played out in the lone vertical merger case litigated by the antitrust agencies in recent decades, namely the 2018 challenge by the Department of Justice to the merger between AT&T and Time Warner. I testified in court as the DOJ’s economic expert in that case, giving me a unique perspective. I explain here how to quantify the increase in rivals’ costs and the elimination of double marginalization caused by a vertical merger and how to evaluate their net effect on downstream customers. I also explain how this economic analysis fits into the three-step burden-shifting approach that the courts apply to mergers under Section 7 of the Clayton Act. Based on my experience in the AT&T/Time Warner case, I identify a number of shortcomings of the 2020 Vertical Merger Guidelines.