United States: The FTC Is Looking You Up And Down(Stream): Insights From The Acting Director Of The Bureau Of Competition On Antitrust Enforcement For Vertical Mergers

Last Updated: January 26 2018
Article by William DeVinney

Since Assistant Attorney General Delrahim's inaugural remarks on vertical mergers (covered here), the business press has been atwitter about the antitrust enforcement agencies' views of those mergers. Bruce Hoffman, the acting director of the Federal Trade Commission Bureau of Competition, recently delivered a speech explaining that the FTC will continue to review vertical mergers as part of its enforcement efforts, and providing insight into the FTC's current analysis of proposed vertical mergers.1

As background, Hoffman described that the FTC applies the same broad analysis to vertical mergers that it does to horizontal mergers: it defines the relevant markets, tests theories of harm, and examines the efficiencies created by the merger. But vertical mergers pose analytical challenges that horizontal mergers do not. Horizontal mergers combine competitors, which necessarily reduces competition by removing substitute goods from the market. Although a horizontal merger may create efficiencies or other pro-competitive effects, they are not a natural consequence.

By contrast, Hoffman further described, vertical mergers often involve complementary products, or integrating steps in the production, distribution, and sales processes, and thus are likely to create efficiencies that benefit the consumer. A vertical merger also may restrict competition in some way, but those restrictions are generally not a natural consequence of a vertical merger.

Those natural characteristics of a vertical merger, "while not necessarily large or dispositive in all cases, render the starting point for [the FTC's] analysis of vertical mergers more challenging than horizontal mergers." 2 Measuring any potential harm to the consumer often depends on predicting the future conduct of the merged firm, or trying to forecast the effect on prices. As Hoffman explained, "there are plenty of theories of anticompetitive harm from vertical mergers[, b]ut the problem is that those theories don't generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions." 3

Potential harms that lead enforcement agencies to consider action

Hoffman identified three potential harmful effects that the FTC considers in deciding whether to act against a proposed vertical merger.

Reduced likelihood of beneficial entry. Historically, the FTC's primary concern about vertical mergers was that they could foreclose or hinder competitive entry because, post-merger, a potential competitor would have to enter at both stages of the market, a two-stage entry. Now, the FTC is also concerned that a vertical merger may prevent or discourage the merging firms from entering one another's market. In particular, the FTC considers whether something about the markets, such as assets, know-how, or reputation, makes entry by the merging firms easier compared to new entrants, meaning the proposed vertical merger would eliminate the most likely new market entrant.

As an example, Hoffman explained that the FTC opposed the vertical merger between Digene Corp. and Cytyc Corp. because of concerns over both types of competitive entry. At the time of the proposed merger, Digene was the sole provider of a DNA test for the human papillomavirus (HPV), the leading cause of cervical cancer. Cytyc had 93 percent of the United States market for the principal screening test for cervical cancer, which incorporated the Digene DNA test. The FTC voted to block the merger because it would remove any incentive (1) for Digene to cooperate with any new market entrant that would compete with Cytyc in producing cervical cancer screening tests, meaning a new entrant would have to make a two-stage entry; and (2) for Cytyc to develop its own DNA test for the HPV virus and compete with Digene, meaning the merger would remove one of the most likely entrants into the market for HPV DNA tests.

Input foreclosure or customer foreclosure. The FTC is also concerned that vertical mergers may cause input foreclosure or customer foreclosure. Input foreclosure occurs where, premerger, the upstream firm supplies both the downstream merger partner and the partner's rivals with a product or input that the downstream firms require to compete. Post-merger, the upstream firm could foreclose supply by refusing to sell to any firm except its merger partner, or to sell only on discriminatory terms. Similarly, customer foreclosure occurs where, premerger, the downstream merger partner purchases supplies from the upstream firm as well as the upstream firm's competitors. Post-merger, the downstream firm could refuse to purchase from those firms competing with its upstream merger partner.

Hoffman cautioned that the potential for input foreclosure or customer foreclosure is not dispositive. The FTC weighs any potential foreclosure against the competitive benefit that likely will occur from reducing transaction costs between the upstream firm and the downstream firm post-merger. Even so, Hoffman acknowledged, the FTC has opposed mergers in the past based on these foreclosure concerns.

Anticompetitive sharing of information about a competitor. The FTC also examines whether a vertical merger will enable one of the merging firms to obtain competitively sensitive information about a competing firm. As an example, Hoffman referred to a situation where a manufacturer acquires its distributor that also does business with the manufacturer's competitor. This, the FTC fears, might enable the acquiring manufacturer to obtain competitive insight about its competitor's business and marketing plans.

Remedies

Hoffman also discussed the potential remedies the FTC may require if it initiates action over a vertical merger. He emphasized that the FTC prefers to implement structural remedies: "First and foremost, it's important to remember that the FTC prefers structural remedies to structural problems, even with vertical mergers." 4 The FTC prefers structural remedies because they "eliminate both the incentive and the ability to engage in harmful conduct, which eliminates the need for ongoing intervention." 5

All the same, Hoffman said, the FTC will impose behavioral remedies where it believes they can prevent competitive harm while allowing the benefits of integration. For example, in the manufacturer-acquiring-its-distributor situation, rather than implement a structural remedy, the FTC may impose a firewall within the distributor precluding its employees engaged with the acquiring manufacturer from sharing competitively sensitive information with its employees engaged with the acquiring manufacturer's competitors.

Hoffman acknowledged that conduct remedies may be more acceptable for vertical mergers than for horizontal mergers. But he concluded his speech by warning that the FTC still may impose a structural remedy when it is determined necessary for a vertical merger viewed as anticompetitive.

Conclusion

Hoffman's speech provided valuable insight into the FTC's current analysis and priorities in reviewing proposed vertical mergers. Antitrust counselors should be prepared to address the concerns set out in his speech.

Footnotes

1 D. Bruce Hoffman, Acting Director, Fed. Trade Comm'n, Remarks at Credit Suisse 2018 Washington Perspectives Conference: Vertical Merger Enforcement at the FTC (Jan. 10, 2018) ("Hoffman Remarks").

2 Id. at 3.

3 Id.

4 Id. at 7.

5 Id. at 8.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions