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On 10 January 2020 the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) announced the release of the 2020 Draft Vertical Merger Guidelines (VMG) for a 30-day comment period. During this period, the DOJ and the FTC will accept comments and suggestions on the draft. Once finalised, the VMG will supersede the 1984 Non-horizontal Merger Guidelines, which have not been updated since they were first introduced. As with any guidelines issued by the agencies, the finalised VMG will be instructive for the agencies' review of vertical mergers and will be persuasive but not binding on the courts should a contested merger enter litigation.
As per the 2020 Draft VMG, 'vertical mergers' combine firms or assets that operate at different stages of the same distribution chain. In describing a vertical relationship, the stage closer to final consumers is termed 'downstream' and the stage further away from final consumers is termed 'upstream'. By contrast, 'horizontal mergers' are transactions that take place between direct competitors.
The 2020 Draft VMG rely heavily on the legal and economic theories and analytical framework set out in the 2010 Horizontal Merger Guidelines (HMG) and are explicitly intended to be read in conjunction with the 2010 HMG. The 2020 Draft VMG state that horizontal considerations are also relevant to the evaluation of the competitive effects of vertical mergers. Such considerations include:
- the analytic framework for evaluating entry considerations;
- the treatment of the acquisition of a failing firm or its assets; and
- the acquisition of a partial ownership interest.
Addressing the issues specific to vertical transactions, the 2020 Draft VMG include modern approaches such as:
- identifying relevant markets and related products;
- identifying market participants, market shares and market concentration; and
- analysing evidence of adverse competitive effects, unilateral effects and coordinated effects and efficiencies.
Some of the highlights of the 2020 Draft VMG include:
- creating a presumptive screen that a transaction is unlikely to harm competition if the combined parties have a less than 20% share in the relevant market and the related product is used in less than 20% of the relevant market;(1)
- crediting the potential for increased efficiencies due to the elimination of double marginalisation (EDM) (ie, combining the upstream and downstream profit margins that can result in reduced prices to end users);(2)
- analysing whether the post-merger firm would likely have access to its competitors' competitive sensitive information and raise rivals' costs;(3) and
- no longer relying on econometric analysis of markets via calculation of the Herfindahl-Hirschman Index of a proposed transaction.
In her concurrent statement regarding the commission's decision to publish the draft guidelines, Commissioner Christine Wilson specifically requested the public's feedback on certain topics raised in the 2020 Draft VMG, including the below:
- Should the treatment of EDM be more closely aligned with the economic literature, which recognises both its significant benefits and the many reasons that these benefits may not be achieved by contract?
- Relatedly, given their close correlation, should pro-competitive merger effects (eg, EDM) and anti-competitive merger effects (eg, raising rivals' costs) be assessed symmetrically, including the extent to which they are merger specific?
- Given that vertical mergers are often pro-competitive, should the area of antitrust concern be limited to oligopoly markets and should the guidelines therefore establish a definitive safe harbour when a merger involves only relatively unconcentrated markets? Further, if a safe harbour is appropriate, at what threshold should it apply?
- When defining markets, should two relevant product markets (one upstream, one downstream) continue to be defined or should the looser requirement to define one relevant product market and identify a related product be adopted?
- What magnitude of anti-competitive effects should be viewed as de minimis in light of EDM and likely vertical efficiencies?
While all of the FTC commissioners agreed that the 1984 Non-horizontal Merger Guidelines should be withdrawn, Commissioners Rebecca Slaughter and Rohit Chopra abstained from voting on whether to publish the 2020 Draft VMG. Commissioner Slaughter expressed concerns about the current proposed guidelines as creating too high a standard of review for proposed transactions and not clarifying the agencies' various investigatory and enforcement powers.(4) In a separate statement, Chopra argued that the draft 2020 VMG do not take into account modern threats to competition or consider whether prior enforcement was effective.