In 2016, the Antitrust Division of the US Dept of Justice (DOJ) challenged the vertical merger of Time Warner (movies) and ATT which owned DirectTV, a cable provider. It was the first litigated vertical merger case in 40 years.
The DOJ used a "foreclosure" theory, arguing that the vertically integrated firm (movies + distribution) would give ATT the incentive and ability, via increased bargaining leverage, to raise the price of Time Warner movies to rival distributors, like Comcast. As a result, Comcast would raise its subscription price and some Comcast customer would shift from Comcast to ATT's DirectTV.
The government argued that these anticompetitive costs outweighed the well-documented procompetitive benefits of vertical integration (Cooper et al., 2005), namely the better incentive alignment of Time Warner and ATT, e.g., that post-merger markups on TimeWarner movies shown by ATT, would fall.
The Antitrust Division lost its case in court because they couldn't prove all the assertions of the theory, that: (i) ATT would raise the price of Time Warner content to rival distributors, (ii) Comcast would raise its subscription price, (iii) that Comcast customers would switch to ATT, and (iv) these anticompetitive costs outweighed the merger's procompetive benefits.
After DOJ lost the case, the merger was consummated. But ATT just sold its remaining stake in DirecTV, undoing the merger the DOJ fought so hard to challenge.
The expert witness for the parties, Dennis Carlton et. al. (2022), weighed in on the failure of the merger:
That the previous integration did not work out as AT&T hoped represents a firm's decision regarding what risks to take in the market, not an indication that the government's alleged harms came to pass. Indeed, the disintegration is evidence that the alleged harms, such as supracompetitive pricing or other exercises of market power, did not occur. The reasoning is straightforward: if the mergers had created significant market power as the government alleged, AT&T would have been incentivized to retain ownership, which would make the subsequent spinoffs less likely (see, for example, Hazlett 2021).
ChatGPT on why Vertical merger cases are hard to win:
- Pro-competitive Justifications: Companies often argue that vertical mergers can create efficiencies, such as reducing costs, improving supply chain coordination, and enhancing product quality. These claims can be compelling in court, making it harder for the government to prove that the merger would harm competition.
- Better incentive alignment between ATT and TimeWarner, e.g., on price, called "the elimination of double marginalization."
- Lack of Established Precedent: There is less legal precedent and fewer clear guidelines regarding vertical mergers compared to horizontal mergers (where firms in the same market merge). Courts and regulators may have less confidence in assessing potential competitive harms in vertical mergers.
- Market Definition Difficulties: Defining the relevant markets can be complex in vertical mergers. Regulators must consider not only the direct competitors in the market but also how the merger affects suppliers and distributors, which often involves nuanced economic analysis.
- Is the market defined at the upstream content level or the downstream distribution level or at both?
- Indirect Effects: The potential anti-competitive effects of vertical mergers are often indirect, making it harder to demonstrate harm. For instance, a merger may not lead directly to higher prices but might reduce competition over time or create barriers for new entrants, which can be more difficult to quantify.
- Dynamic Nature of Markets: Many industries are dynamic, and the competitive landscape can change rapidly. Regulators and courts must consider not only the current state of competition but also future market developments, which adds uncertainty.
- Economic Theories: There are differing economic theories about how vertical mergers can affect competition. Some economists argue that these mergers are typically beneficial, while others highlight potential risks. This divergence in expert opinion can complicate litigation.
These factors contribute to the difficulty in successfully challenging vertical mergers in legal and regulatory contexts.
- For example, see Boshoff et al (2021), who show that how and over what parties bargain, namely one- or two-part prices, determine whether a merger will raise price.
REFERENCES
- Boshoff, Willem H. and Froeb, Luke M. and Minnie, Roan and Tschantz, Steven T., Bargaining Competition and Vertical Mergers (March 31, 2021). SSRN
- Dennis W. Carlton , Georgi V. Giozov, Mark A. Israel and Allan L. Shampine, 'A
Retrospective Analysis of the AT&T/Time Warner Merger' (2022) 65 JLE S461
- Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN
- i) Comment by John Comanor, Frederick Scherer, and Robert Steiner
- ii) Reply by John Comanor, Frederick Scherer, and Robert Steiner
- Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy, George Mason Law Review, 13:2 (Winter, 2005) 289-308. SSRN
- Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Restraints and Antitrust Policy: What about the Evidence? Competition Policy International, 1:2 (Autumn, 2005) 45-64. SSRN
- i) Comment by Frederick Scherer (2005)
- ii) Comment by Ralph Winter (2005)
- iii) Reply by authors (2006)
- iv) Rejoinder by Ralph Winter (2006)
- Thomas Hazlett, “Antitrust Activists Want to Go Full Throttle. Here's a Lesson. They Should Consider First.” Barron's, July 29, 2021,.
