Cornerstone Research Staff Review New U.S. Vertical Merger Guidelines

The Cornerstone Research authors note four important changes to the new guidelines, which are consistent with proposals submitted by Cornerstone Research staff and experts in February 2020.

In January 2020, the agencies released the Draft Vertical Merger Guidelines for public comment. Cornerstone Research staff and experts submitted three public comments to the agencies in response to the draft guidelines. Based on an initial review, the Cornerstone Research authors note four important changes to the new guidelines, which are consistent with proposals submitted by Cornerstone Research staff and experts in February 2020:

The threshold-based safe harbors in the draft have been replaced with a statement about the set of facts that would lead the agencies to raise concerns (a rebuttable presumption). In the draft, the threshold for the relevant market was decoupled from the incentive for post-merger manipulation, and the threshold for the related market would have been difficult to implement. These thresholds were the subject of considerable debate in the comments. In the final guidelines, they have been replaced with presumptions based on a robust framework of competitive harm in vertical mergers, which will provide a healthier screen on the mergers to be investigated.

The guidelines now provide a framework that sets out the fundamental elements of a theory of harm through raising rivals’ costs (RRC) or foreclosure—the ability and incentive framework. The robust framework of competitive harm that allowed the guidelines to dispense with thresholds is also new. The framework makes clear that for anticompetitive concerns to arise from a vertical merger, the merged firm must be able to leverage its power in one market to competitively disadvantage its rivals in another market, and that such a strategy must be profitable to the merged firm given its costs and benefits.

The guidelines now make explicit that they encompass diagonal mergers and mergers of complements, in addition to vertical mergers. The draft guidelines stated that they would apply only to vertical mergers. A number of comments, including the Cornerstone Research comments, noted that the approach in the guidelines could easily be extended to other types of non-horizontal mergers. Revising the guidelines to encompass these mergers brings the U.S. guidelines into closer alignment with those of the EU and the UK (although a number of important differences remain). In addition, the agencies helpfully point out that a merger may present both vertical and horizontal concerns, and that both sets of guidelines can be relied on to review such a merger. This avoids unnecessary battles to pigeonhole mergers into one or the other set of guidelines.

The agencies have avoided potential confusion and inconsistency from the draft guidelines’ positioning of Elimination of Double Marginalization (EDM) in its own independent section. Moving EDM into the section on pro-competitive effects removes the impression that EDM might face a different standard than other efficiencies (e.g., placing the burden of proof on the agencies). The new guidelines are explicit that “it is incumbent on the merging firms to provide substantiation for claims that they will benefit from [EDM].” Separate treatment of EDM also created a risk of internal inconsistency, because the evidence base for assessing EDM and competitive harms like RRC and foreclosure overlaps substantially. The guidelines now clarify that, to the extent possible, the same set of facts and assumptions will inform the conclusions about the two.

“The final guidelines are a significant improvement that still leave a number of areas to be developed with experience in practice. For example, efficiencies are often central to vertical and complementary mergers, but the guidelines remain vague on the types of efficiencies that may arise beyond EDM,” noted Bob Majure, a Cornerstone Research vice president and former Director of Economics for the Antitrust Division of the U.S. Department of Justice. “Additionally, the examples in the guidelines could have been expanded further to address the complex relationships that arise in industries like healthcare and technology. As the agencies refine their approach to non-horizontal mergers, we hope these guidelines will be kept more up to date than their predecessors.”

Comments Submitted by Cornerstone Research Staff and Experts

Comments on the January 2020 Draft Vertical Merger Guidelines
Aviv Nevo of the University of Pennsylvania; Kostis Hatzitaskos, W. Robert Majure, and Ana McDowall of Cornerstone Research

While recognizing that vertical mergers involve a much wider range of scenarios and possible merger effects, the authors propose a framework of what changes when vertically related firms integrate. This framework is helpful in providing more clarity around such questions as:

• The way markets should be defined and how that connects to the theories of vertical mergers
• Share thresholds and what relevance each may have in the usual theories of vertical mergers
• Double marginalization and whether it should be treated as distinct from other efficiencies

There are also some open questions about which mergers fall under the scope of the vertical merger guidelines. Mergers of complements appear to be excluded, and it remains unclear how the agencies will treat mergers with both vertical and horizontal components.

Comments on the January 2020 Vertical Merger Guidelines and the Healthcare Sector
Gautam Gowrisankaran of Columbia University; Avigail Kifer, Dina Older Aguilar, and Andrew Sfekas of Cornerstone Research

The draft guidelines focus on analyzing traditional industrial relationships such as input suppliers and manufacturers, or manufacturers and distributors. Non-horizontal mergers in healthcare, however, frequently involve complementary rather than vertical relationships, and encompass key complicating features that are currently overlooked by the draft guidelines, including:

• Moral hazard
• Information asymmetry
• Complex reimbursement schemes
• Price negotiations and two-stage competition

These features also complicate vertical merger analyses in many other markets, and are worth examining.

The authors propose two potential expansions of the guidelines to make them more relevant to healthcare and related markets.

Comparison with the EU Non-Horizontal and UK Merger Assessment Guidelines
Kostis Hatzitaskos and W. Robert Majure of Cornerstone Research

In these comments, the authors compare and contrast the draft guidelines to the analogous EU non-horizontal merger guidelines and the UK Merger Assessment Guidelines. The authors review the guidance set out in each of the documents, and the degree of convergence between them, with respect to:

• Market definition
• Safe harbor thresholds
• Unilateral effects
• Coordinated effects
• Efficiencies

The draft guidelines are generally less specific than their EU and UK counterparts. While this may make them more resilient to changes in case law and in the understanding of economic issues, it reduces their usefulness for practitioners advising their clients, or for generalist judges deciding on challenges.

The views expressed in these public comments are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.