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Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods

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Abstract

This article surveys recent empirical evidence on efficiencies and competitive harm that are associated with vertical mergers. It discusses both ex post or retrospective empirical studies that rely on post–merger data and ex ante or forecasting techniques that use premerger data. It develops the idea that although there is a need for vertical merger screening tools there are a number of problems that are associated with attempts to adapt horizontal screens to the vertical context. Mergers in the technology, media, and telecom sectors are emphasized because they tend to dominate contested vertical mergers.

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Notes

  1. Priest and Klein (1984) discuss the distinction between litigated disputes and disputes that are settled before or during litigation. Both classes are included in actions.

  2. See Lafontaine and Slade (2007) for a survey of earlier work.

  3. The authors use a broad definition of vertical integration that partially accounts for the strength of this finding.

  4. Fraction internal shipment = internal shipments/total shipments of a product for which the shipping firm has a vertically linked establishment in the same zip code as the shipping address.

  5. Ronald Coase, Oliver Williamson, Bengt Holmstrom, and Oliver Hart.

  6. Kwoka and Slade (2020) contains a critique of the application of the simple double monopoly markup model to more realistic situations.

  7. The intuition behind this result is as follows: When double marginalization is eliminated, the products with eliminated margins become relatively more profitable to sell. This gives the firm incentives to divert demand towards those products by increasing the prices of its products for which double marginalization was not eliminated.

  8. Earlier empirical assessments of foreclosure are summarized in Lafontaine and Slade (2007), Table 15, p. 672).

  9. E.g., Chipty (2001), Suzuki (2009), Bilotkach and Huschelrath (2013), Crawford et al. (2018).

  10. The fact that the US DOJ and FTC have recently released new Vertical Merger Guidelines indicates that people in those agencies think that some vertical mergers are anticompetitive.

  11. If each firm produces multiple products, there is a matrix of diversion ratios and UPPs, one for each product pair.

  12. The US Horizontal Merger Guidelines (2010) try to take those shortcomings into account.

  13. UPPs are always ‘misspecified’ in the sense that they are first–order conditions that neglect the factors cited above, which simulations capture. However, the simulations that are used for screening are also highly approximate.

  14. Both horizontal and vertical GUPPIs are often expressed as ratios of monetary values: In the case of the vGUPPIu, it is the value of the sales that are diverted to the downstream merging partner divided by the value of the sales that are lost by the upstream merging partner.

  15. Early applications of horizontal merger simulations include Hausman et al. (1994), Nevo (2000), Pinkse and Slade (2004), and Ivaldi and Verboven (2005).

  16. Grieco et al. (2018) consider endogenous merger–related cost changes that are due to nonconstant returns to scale and technology transfer.

  17. This process is described in Rogerson (2014) and advocated in Shapiro (2019).

  18. Note that Das Varma and De Stefano consider only pricing externalities, not conventional efficiencies, which can reduce prices in both horizontal and vertical mergers.

  19. Access rules are easy to enforce because they rely on customers to enforce the rules.

  20. The patient steering effect is obtained by examining the bargaining surplus of an integrated insurer with a rival hospital, whereas the enrollee steering effect is obtained by examining the bargaining surplus of an integrated hospital with a rival insurer. Insurers have incentives to steer patients away from rival hospitals, whereas hospitals have incentives to steer enrollees away from rival insurers.

  21. Slade (2004) concludes that, when products are homogeneous, concentration indices predict markups reasonably well.

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Acknowledgements

An earlier version of this article was prepared for the panel on Vertical Mergers in the Technology, Media, and Telecom Sectors, OECD Competition Committee Meetings, June 5-7, 2019, Paris, France. I would like to thank Joris Pinkse, the editor Larry White, and two anonymous referees for thoughtful comments.

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  1. Vancouver School of Economics, The University of British Columbia, 6000 Iona Drive, Vancouver, BC, V6T 1L4, Canada

    Margaret E. Slade

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Slade, M.E. Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods. Rev Ind Organ 58, 493–511 (2021). https://doi.org/10.1007/s11151-020-09795-7

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