Out of all the changes proposed in the Federal Trade Commission’s (FTC) new merger guidelines, the most immediately apparent is that there is now just one set of guidelines, not two. Since the first merger guidelines published by the FTC in 1968, a distinction has been made between horizontal and vertical mergers. In an attempt to turn back the clock and impose a structuralist approach to merger reviews, FTC Chair Lina Khan has removed a necessary and helpful bifurcation. As is often the case with Chair Khan’s decisions, the result is the abandonment of consumer interest for competitors.
The distinction between horizontal and vertical mergers lies in whether the two firms merging are competing in the same market (horizontal) or exist along a supply chain (vertical). This difference is significant for antitrust agencies tasked with protecting competition in the market to maximize consumer welfare.
Horizontal mergers, for example, directly involve the merging of competitors and, thus, the consolidation of market shares. Horizontal mergers are not de facto an issue since larger firms could lower prices through economies of scale and even increase competition. If there are other large firms, the newly merged firm could become better able to compete with them. However, the nature of anticompetitive evaluation for these mergers is fundamentally different than for vertical mergers.
A vertical merger often benefits consumers, with integration along a supply chain often benefiting efficiency and creating downward pressure on consumer prices. The reasons include several factors, including increased synergy between the merged firms, lower managerial costs, and below-market rates on supplier products. Since adopting more consumer-focused evaluation techniques, antitrust law has been generally amenable towards mergers that result in higher market shares resulting from the firm’s ability to increase efficiency and consumer welfare.
There are 13 proposed guidelines which, if accepted, will replace the 2010 Horizontal Merger Guidelines (HMG) and the recent 2020 Vertical Merger Guidelines (VMG). The FTC has signaled a desire to change the existing guidelines even before President Biden prompted them to do so with his Executive Order on Promoting Competition in the American Economy. It was shortly after the release of the VMG in 2020 that the SEC removed support for the guidelines, leading to speculation of a revised VMG in the future. What was unexpected was an overhaul of the VMG and the HMG into a new unified document.
What has concerned experts is that the text itself blends the distinction between the two types of mergers in highly problematic ways. As mentioned, vertical and horizontal mergers are fundamentally different, with different evaluations, that is, if you care about the welfare of consumers.
One example of why mergers should be differentiated can be found in how market share should be considered. In the proposed guidelines, guideline 7 focuses on mergers that may “entrench or extend dominant positions.” Applying to firms with at least 30 percent market shares, guideline 7 deems mergers that extend said position further to risk entrenching a market-dominant firm. Mergers in danger of violating this provision are “neither strictly horizontal nor vertical,” thus theoretically applying to both. However, how size impacts competition is different.
For vertical mergers, an increase in market share often results from increased efficiency, lower costs, and attracting more customers, an inherently pro-consumer market expansion. Horizontal mergers are not inherently pro-consumer in the same way, as an increased market share resulting from the acquisition of competition does not necessarily put downward pressure on prices, though it can.
The core difference concerns the relationship between consumer prices and market shares. Vertically merged firms often cut costs through vertical integration, which can lead to an increased market share, while horizontal mergers increase market shares and may cut costs but don’t inherently. To judge an increase in market share, indistinguishable from merger type, obfuscates these fundamental differences and thus obscures the impact on the consumer.
Such an oversight over the differences in merge impacts indicates the FTC’s current approach to antitrust, which prioritizes size of any kind. Consumers are no longer a primary factor in the FTC’s decision-making.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.