The empirics of vertical integration and foreclosure

Economic theory underlines that vertical mergers are very likely to lead to efficiencies and benefit consumers. On the other hand, more recent research found that vertical integration can also be used as an anti-competitive tool by firms, and harm consumers, notably through foreclosure. These opposing effects make the assessment of vertical mergers a subtle exercise. This article argues that because of the complexity of the issue, it is important to rely on empirical studies to understand in practice the consequences of vertical integration. It reviews three recent articles on vertical mergers to better illustrate what can be learnt ex post from such studies and the methods employed. It then looks at the TomTom/Tele Atlas merger where the European Commission ex ante conducted an evaluation of the incentives to foreclose by the new proposed entity. Econometric tools provide interesting insights on the mechanisms at play in vertical mergers, both ex ante and ex post, and therefore usefully complete economic theory.

1. The stance against non-horizontal mergers by competition authorities has considerably varied over the last decades. In the United States, the Department of Justice (DOJ) merger guidelines issued in 1968 used to consider that vertical mergers between firms with market shares above 10 percent in their relative markets were suspicious. As a consequence, many non-horizontal mergers were challenged by US competition authorities during the 1970s. On the contrary, the 1982 and 1984 DOJ guidelines considered vertical mergers to be problematic only insofar they had horizontal consequences. After the issuance of the 1984 merger guidelines, very few vertical mergers were challenged. Since then the new guidelines were named “Horizontal Merger Guidelines” and they left aside vertical integration.

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Emmanuel Frot, The empirics of vertical integration and foreclosure, May 2011, Concurrences Review N° 2-2011, Art. N° 35741, pp. 33-39

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