On June 30 the US Department of Justice (DOJ) and Federal Trade Commission (FTC) issued their long-awaited Vertical Merger Guidelines. The final Guidelines come almost six months after the DOJ and FTC issued the guidelines in draft form.1 They reflect a number of changes from the previously-issued draft that respond in part to critiques of the draft from FTC Commissioners Rebecca Slaughter and Rohit Chopra and to the more than seventy comments submitted on the draft. Despite the changes to address some of the concerns of the dissenting Commissioners, Commissioners Slaughter and Chopra each again dissented from the final Guidelines.

The purpose of the Guidelines is to "outline the principal analytical techniques, practices, and enforcement policies" of the DOJ and FTC.2 They supersede the 1984 Non-Horizontal Merger Guidelines (originally issued in 1984 to address both vertical and horizontal mergers), which have not reflected the actual analysis applied to vertical mergers by the agencies for many years. The revised Guidelines appear consistent with the agencies' approach in recent vertical mergers, and to that extent are a helpful guide to agency practice. But the Guidelines focus on modes of analysis and do not provide detailed guidance on the agencies' application of the analytical approaches and tools they describe.3 Because merger analysis is highly fact-intensive (and vertical merger analysis perhaps even more so), the agencies' refusal to provide clear safe harbors or to constrain their exercise of discretion to investigate vertical transactions is perhaps not surprising—even if history suggests that few of the many vertical transactions will be challenged, most are likely to be addressed with remedies, and few will be challenged successfully.

The Agencies' Analytical Framework

The Guidelines apply to vertical mergers (those that "combine firms or assets at different stages of the same supply chain"). But—although not mentioned in the Draft Guidelines—the final Guidelines also discuss so-called "diagonal" mergers ("those that combine firms or assets at different stages of competing supply chains," such as a firm that supplies a competitor of its acquirer but not its acquirer) and "vertical issues that can arise in mergers of complements." As we discuss below, it is not clear what "vertical issues" are created by mergers of complements, and the agencies' analysis fits into what is typically called conglomerate theories of harm. And while the old Non-Horizontal Merger Guidelines addressed potential competition theories, the Guidelines are clear that the analysis in the Horizontal Merger Guidelines applies to potential competition theories.

The Guidelines emphasize that they should be read in conjunction with the Horizontal Merger Guidelines, which discuss issues such as entry consideration, acquisitions involving failing firms, and partial acquisitions that are relevant to vertical mergers as well.

The Role of Market Definition and Market Shares

Consistent with Clayton Act Section 7's condemnation of mergers only when they may substantially lessen competition "in any line of commerce" and precedent that requires proof of harm to competition in a relevant market, the Guidelines provide that the Agencies will "normally identify one or more relevant markets in which the merger may substantially lessen competition" using the method of the Horizontal Merger Guidelines, while also reiterating the "limitations of market definition" described in the Horizontal Merger Guidelines.4 The Guidelines' analysis also looks to one or more "related products," which are "supplied or controlled by the merged firm and are positioned vertically or are complementary to the products and services in the relevant market." These may include input products, distribution channels that provide access to customers, or complementary products or services. The Guidelines emphasize that relevant markets can be both upstream or downstream of the related market. For example, the merger of a firm and one of its suppliers can affect competition among distributors (who may lose access to the acquired product) as well as competition among product suppliers (who may lose access to a distributor of their products).

Departing from the old Non-Horizontal Merger Guidelines' emphasis on shares and industry concentration and a 20% share quasi-safe harbor in the Draft Guidelines, the Guidelines note only that the "Agencies may consider measures of market shares and market concentration," but will do so along with other reliable evidence to determine whether the transaction is likely to harm competition. The 20% share threshold in the Draft Guidelines that has been eliminated in the final Guidelines was not an absolute line. The Agencies stated in the Draft Guidelines only that they were "unlikely to challenge a vertical merger" when shares in both the relevant market and related product market were less than 20%. But even with the final Guidelines' abandonment of the 20% share threshold, the Agencies are unlikely to dedicate substantial resources to an investigation where shares are low. That is because the acquisition of one of many input suppliers or one of many distributors (or end customers) by a firm that itself faces effective competition is unlikely to harm competition absent unusual circumstances. In the last twenty years the Agencies appear never to have challenged a vertical transaction involving shares below 40%.5 Indeed, DOJ lost its challenge to the AT&T/Time Warner transaction despite alleging that AT&T's share was more than 40% in many local markets, and more than 80% in at least one market.6

Elimination of Double Marginalization

A key feature of vertical mergers is the elimination of "double marginalization" (EDM). EDM can occur when two vertically related firms that individually charge a profit-maximizing margin on their products choose to merge. Absent the merger, the downstream merging firm would ignore any benefit to the upstream merging firm from setting a lower downstream price and making higher sales. But if the two merge, the resulting firm will benefit from both margins on any additional sales. Capturing the upstream margin through the merger may make the price reduction profitable even though it would not have been profitable prior to the merger. EDM may thus benefit both the merged firm and buyers of the downstream product.

The Guidelines recognize that "vertical mergers often benefit consumers through the elimination of double marginalization, which tends to lessen the risks of competitive harm." Yet the Guidelines also add language from the old Non-Horizontal Merger Guidelines emphasizing that "vertical mergers are not invariably innocuous."7 Nevertheless, the Guidelines also recognize that the procompetitive effects of EDM are an inherent feature of any economic model that uses the "alignment of economic incentives between the merging firms" to predict incentives to foreclose or raise rivals costs.8

The Draft Guidelines treated EDM as a feature of a vertical merger rather than an efficiency that the parties must show to be merger-specific (as they must do for claimed efficiencies in both vertical and horizontal mergers). The final Guidelines continue to recognize that EDM is not a traditional "efficiency" and do not expressly place the burden on merging firms to prove a cost reduction. Nevertheless, it is "incumbent upon the merging firms to provide substantiation for claims that they will benefit from the elimination of double marginalization" based on a comparison to the prices that would likely be paid for inputs absent the merger.9

In a departure from the Draft Guidelines, the final Guidelines add an express requirement that EDM be merger-specific.10 Where the parties could obtain the same cost reductions through contracting, the benefits of EDM are not merger-specific. In considering whether EDM is merger-specific, the Agencies note that the merging parties' own premerger contracting practices are "often the best evidence" of what would happen absent the merger. The Agencies note that they will also look at "contracts between similarly situated firms" and "contracting efforts considered by the merging firms." The Agencies will not reject the merger-specificity of EDM "solely because it could theoretically be achieved but for the merger, if such practices are not reflected in documentary evidence."11

Unilateral Effects Theories of Anticompetitive Harm

The Guidelines focus on two theories based on unilateral effects of vertical mergers—foreclosure/raising rivals' costs and access to competitively sensitive information—while noting that "[t]hese effects do not exhaust the types of possible unilateral effects."12

Foreclosure/Raising Rivals Costs

Consistent with longstanding Agency practice and the case law, the agencies will look to whether merging firms have both the ability and the incentive to pursue a foreclosure strategy.13 Where competitors of the merging firm could readily self-supply or turn to alternative suppliers (or alternative distribution channels where the concern is customer foreclosure), the acquisition is unlikely to create the ability to foreclose. The Agencies will evaluate whether switching to an alternative supplier is feasible using the customer switching analysis of Section 4.1.3 of the Horizontal Merger Guidelines and will evaluate whether rivals can switch "without any meaningful effect on the price, quality, or availability of products or services in the relevant market."14

It is worth emphasizing that the Agencies' analysis focuses on effects on the market in which competition is potentially constrained. Showing that prices charged to a rival might increase is not enough if those higher input costs will not change the rival's pricing in the downstream market (as might be the case if the input accounted for a tiny portion of cost of goods sold). The Guidelines also recognize that downstream effects will depend on whether the merging firm is able to reduce its costs through EDM, and the Agencies will assess the "net effect" considering both the risk of higher costs passed along to consumers by rivals of the merged firm and lower prices charged to consumers by the merged firm as a result of EDM or other efficiencies.15

The Guidelines separately discuss the issues that arise in so-called "diagonal" mergers.16 A firm that acquires a company that supplies its rivals but not itself may have the same ability and incentive to pursue a foreclosure strategy as a firm in a traditional vertical merger. However, where the acquiring firm is unlikely to use the inputs supplied by the acquired firm (e.g., because they are incompatible with its products and switching costs would be high), potential anticompetitive effects from foreclosing or raising the costs of rivals will not be offset by EDM, increasing the likelihood that the vertical merger would harm competition by leading to higher prices for consumers.

Requiring Two-Level Entry

In addition to foreclosing existing rivals through denial of access or higher costs, the Guidelines note that vertical mergers can have anticompetitive effects by raising barriers to entry through requiring "two-level entry."17 This can happen where a potential entrant that would have received supply of a necessary input absent the merger is forced to enter both the upstream and downstream markets in order to compete successfully with the merged firm. Because two-level entry "may be more costly and riskier than entering the relevant market alone," a vertical merger may harm consumers by deterring new firms from entering concentrated markets. However, as with the analysis of other theories of foreclosure, the Agencies' focus is not merely on whether entry is likely to be foreclosed, but on whether consumers are likely to be harmed given the merged firm's lower costs through EDM.

Access to Competitively Sensitive Information

Even if a merged firm would not have the ability and incentive to pursue a foreclosure strategy after a merged firm, the Guidelines note that a vertical merger may give a combined firm access to competitively sensitive information about its rivals (such as information about a rivals' volume of purchases of essential inputs).18 Consumers may be harmed if the merged firm can use this information to moderate its competitive response to a rival's actions, such as by not responding to price cuts based on knowledge of the rival's ability to increase sales that depend upon a scarce raw material sourced from the merged firm.19 In addition, the Guidelines note that rivals may refuse to do business with a merged firm because of the risk that the merged firm would misuse the rival's competitively sensitive information. Consumers may be harmed if the rival would become a less effective competitor by being forced to rely on alternative suppliers, including the possibility that rivals will be forced to pay higher prices because they have fewer acceptable options for supply.

Foreclosure Through Bundling After The Acquisition of a Complementary Product.

The Guidelines address a new theory of competitive harm not discussed in the Draft Guidelines: potential foreclosure through the acquisition of a firm that makes complements of products in the relevant market.20 While the Guidelines characterize this as a "merger of complements raising vertical issues," it is not clear how such a transaction can properly be characterized as vertical (or as raising "vertical issues"). Rather, such transactions are normally characterized as "conglomerate mergers." The example in the Guidelines notes that in mergers involving complements the Agencies may investigate whether the merged firm would have the ability and incentive to disadvantage rivals through bundling strategies, such as raising costs to consumers that do not buy both complementary products from the merged firm. On the other hand, the Guidelines also acknowledge that the merged firm may have an incentive to offer lower prices to customers that buy both complementary products. And the Guidelines further note that a firm selling complementary products may have an incentive to reduce prices in order to increase demand for the acquired product; such an incentive would not exist absent the merger, and thus in that sense "can lead to a pricing efficiency analogous to the elimination of double marginalization."21 Where the Agencies perceive a risk of higher prices to customers that do not take the bundle, the Agencies say that they will "conduct a balancing of the effects to determine the net effect on the prices customers will likely pay" given this countervailing incentive to reduce prices to customers that do take the bundle.22

Analysis of the risk of post-merger bundling or tying has long been part of the toolkit used by antitrust enforcers outside the United States. Most famously (or infamously), the European Commission blocked GE's proposed acquisition of Honeywell based on such a conglomerate theory. The United States, however, has asserted in the Organisation for Economic Co-operation and Development (OECD) that it is inappropriate to block a transaction on such grounds, both because bundling is often procompetitive (as the Guidelines recognize) and because it is difficult to predict the strategies that will be pursued by the merged firm.23 That said, the analysis under the Guidelines differs in important respects from the worst excesses of conglomerate merger theory outside the United States. In GE/Honeywell the EC focused on a theory that the merged firm would be more efficient and use that newfound efficiency to harm rivals. The Guidelines focus on the risk that the merged firm will raise prices to consumers that do not take the bundle and credit the reduced prices to consumers that take the bundle as an offsetting efficiency. As such, the Guidelines fit comfortably within the focus on harm to consumer welfare rather than harm to competitors under US law. It remains to be seen how the Agencies will conclude that they have evidence that anticompetitive bundling—so-called "disloyalty surcharges"—are actually likely to occur in order to support a claim that a merger of complements violates Section 7.

Moreover, despite the US Agencies' statements in the OECD, we are aware that the US Agencies have from time to time looked at potential bundling and tying theories, though they have apparently never included such a theory in a settlement or litigated complaint. Because the purpose of the Guidelines is to help antitrust practitioners and industry understand that modes of analysis that the Agencies actually employ, the Guidelines' discussion of mergers of complements provides some useful transparency regarding the Agencies' approach.

Coordinated Effects Theories of Anticompetitive Harm

The Guidelines point to the discussion of coordinated effects in Section 7 of the Horizonal Merger Guidelines, noting that the Agencies are more likely to challenge a merger on the basis of coordinated effects when the relevant market shows signs of being vulnerable to coordinated conduct and the merger may enhance that vulnerability.24

Just as in the case of a horizontal merger, the Guidelines note that a vertical merger may increase the risk of coordination by eliminating the constraint posed by a maverick firm. In a horizontal merger, the constraint imposed by a maverick firm is eliminated through the acquisition of the maverick. In a vertical merger, the maverick's constraint is eliminated or weakened through foreclosure or raising rivals costs. A merger that gives the combined firm access to competitively sensitive information regarding its rivals may also raise the risk of anticompetitive coordinated effects.25

What's Next

The Guidelines do not address the issue of remedies in vertical mergers. Under AAG Makan Delrahim, the Antitrust Division has become far more skeptical of conduct remedies in vertical mergers. The FTC has a preference for structural remedies, but has taken conduct remedies in recent vertical cases.26 Given that there remains some distance between the approaches of the two agencies, it is perhaps not surprising that the Guidelines remain silent on the issue despite the requests from a number of commenters on the Draft Guidelines for additional clarity.

The two Democratic FTC Commissioners—Rohit Chopra and Rebecca Kelly Slaughter—dissented from the issuance of the final Guidelines just as they had dissented from the Draft Guidelines. Both object to the process by which the final Guidelines were issued -- reflecting meaningful changes from the Draft Guidelines without additional opportunities for public comment -- and to their substance. Notably, while the revised Guidelines do not create a presumption that vertical mergers are procompetitive (and also note that the theories of harm discussed do not purport to be exhaustive), both object to what they see as overemphasis of the benefits of vertical mergers and the failure to discuss additional concerns with vertical mergers such as effects on innovation and on labor markets. Both also have concerns with the Guidelines' treatment of EDM, emphasizing the view that EDM may not be achieved (e.g.,because of difficulty switching to inputs provided by the merged firm or because the firm is already vertically integrated) and that the benefits of EDM many not be passed along to consumers. If there is a change in the leadership at DOJ and the composition of the Commission after the November elections, it is possible that new Agency leaders will push to revise the Guidelines to address these issues.


1. Arnold & Porter published an Advisory regarding the Draft Guidelines.

2. Guidelines § 1.

3. In a speech before publication of the Draft Guidelines, a senior FTC official stated that the Commission staff was working on a "vertical merger commentary" similar to the agencies 2006 Commentary on Horizontal Merger Guidelines that "could serve as a substitute for, or complement to vertical merger guidelines" that "is intended to articulate and explain the Commission staff's analytic framework for reviewing, analyzing and remedying what might be an anticompetitive vertical merger, and will include case examples." It is unclear whether the FTC still plans to issues such a commentary or if it will be a joint commentary with the DOJ.

4. See Guidelines § 3.

5. See American Bar Association Antitrust Law Section, Comments on the U.S. Antitrust Agencies' Draft Vertical Merger Guidelines (Feb. 22, 2020) at 8.

6. Complaint at 14, U.S. v. AT&T Inc., 310 F.Supp.3d 161 (D.D.C. 2018), (No. 1:17-cv-02511); U.S. v. AT&T Inc., Expert Report of Carl Shapiro at 182.

7. Guidelines § 1; the same language is found in § 4.0 of the Non-Horizontal Merger Guidelines.

8. Guidelines § 6 ("Since the same source drives any incentive to foreclose or raise rivals' costs, the evidence needed to assess those competitive harms overlaps substantially with that needed to evaluate the procompetitive benefits likely to result from the elimination of double marginalization.").

9. Id. The final Guidelines delete a discussion in the Draft Guidelines regarding reduced effects of EDM where the parties engaged in premerger contracting that aligned their incentives, such as through the use of a two-part tariff with a fixed fee and low incremental unit pricing.

10. Guidelines § 6.

11. Id.

12. Guidelines § 4.

13. For example, DOJ obtained a consent decree to address concerns regarding Anheuser-Busch InBev's 2016 acquisition of SABMiller plc, alleging that it "would increase ABI's incentive and ability to disadvantage its remaining rivals by limiting or impeding the distribution of their beers." Similarly, the FTC entered a consent decree to resolve concerns with General Electric's acquisition of Avio S.p.A., alleging that GE's acquisition would "provid{e} GE with the ability and incentive to profitably disrupt the design and certification" of a key part used in a competitor's aircraft engine.

14. Guidelines § 4.a.

15. See also Guidelines Example 3 (even if rivals set higher prices because their costs go up, where the merged firm has an incentive to lower retail prices through the elimination of double marginalization "it is a factual question whether competition in the retail market would be lessened, such that consumers in the retail market would pay higher prices, on average, after the merger.").

16. Guidelines, Example 7. While the Draft Guidelines did not expressly address diagonal mergers, their discussion of efficiencies notes that "{t}here will be no elimination of double marginalization if the downstream firm cannot use the inputs from the upstream one, for example, because it uses an incompatible technology."

17. Guidelines, Example 4.

18. Guidelines § 4.b.

19. For example, after investigating Broadcom's acquisition of Brocade, the FTC obtained a consent decree to resolve concerns that Brocade could use access to competitively sensitive information from Broadcom's other customers to unilaterally exercise market power or to facilitate collusion. When GrafTech, a manufacturer of graphic electrodes, sought to acquire Seadrift coke, which manufactured a critical raw material used to make the electrodes, the DOJ expressed concern that GrafTech's MFN pricing with a Seadrift competitor (and audit rights to enforce that MFN) would mean Seadrift could get access to "verified, customer-specific pricing and production information," which would facilitate tacit collusion.

20. Guidelines Example 6.

21. Guidelines § 6.

22. Guidelines Example 6.

23. See OECD, Competition Policy Roundtables, Vertical Mergers, 214, 219 (2007) (statement by the United States noting that one issue with a conglomerate theory "is that it has been used in some cases to block mergers . . . on the basis of a theory of competitive harm that depends on a highly attenuated chain of causation that invites competition authorities to speculate about what the future is likely to bring. . . . Such hypothetical possibilities would not support a challenge under Clayton Section 7, which requires a showing of a substantial probability that the merger will lessen competition. This requirement is a sound one—an effort to assess and weigh anticipated near term efficiency benefits against more speculative longer term market power possibilities would carry a high risk of enforcement errors and of deterring economically desirable transactions.").

24. Guidelines § 5.

25. Id. That was the theory the FTC applied in Broadcom/Brocade and GrafTech/Seadrift discussed in n.19, supra.

26. For example, the consent decree in Staples/Essendant required a firewall and the decree in Northrop Grumman/Orbital ATK imposed a nondiscrimination requirement as well as firewalls.

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